Thursday, July 16, 2009

Ilargi: Foreclosures. I’ve never been foreclosed on. I can only imagine what it must feel like, be like. Having to tell your little children that they will never see their home again. That they will now live with grandma, or in a smaller place, or a tent.

"More than 1.5 million properties received a default or auction notice or were seized by banks in the six months through June, the Irvine, California-based seller of default data said today in a statement. That’s a 15 percent increase from the year earlier. One in 84 received a filing."

Annualized, that's 3 million homes, or one in 42 U.S. households, which directly affects some 10 million people, and indirectly perhaps as much as a third of the population, with neighbors, suppliers, family etc etc. tossed in.

We’re threatening to become blind and immune to numbers. "Trillion" is a household term, where it never was until 2 years ago, like almost no-one would have known what a tsunami was until one happened, and now everybody thinks they do. The effect of billion and trillion becoming so normal in our daily language, what does it mean to those of us not directly impacted that 10 million of our fellow citizens are under threat of losing their homes?

It has become such a seemingly insignificant number, 10 million. Still, it’s more than New York City’s entire population, and it's more than the biggest 7-8 states in the country.

The main factor these days in foreclosure numbers is unemployment. Initial job claims fell, and the hallelujah chanters are out in droves. Praise the deity, only 522.000 people (unrevised) applied for claims in the past week. All we need to feel better is for a number to be smaller than another number, or bigger where that applies. There are lots of voices out there who would argue that Goldman's multi-billion salary and bonus package is great news. The government is among those voices. So is Congress.

The idea is that the economy has been saved because a combination of first, childish and borderline constitutional loosened accounting regulations, and second, "Federal” Treasury Reserve pump and dump practices financed with taxpayer funds, have left the biggest banks standing. To date. And if Wall Street is alright, so are we all, or so goes the train of "reasoning", which is surprisingly hardly ever questioned.

The notion that the trillions in taxpayer money might alternatively have been used to aid the rightful owner of that money, the taxpayer, seems to have been completely lost in the smoke screens so expertly drawn up (or is that down?) by Washington, Lower Manhattan and the media they have a mutually parasitic relationship with.

Goldman Sachs has received a lot more public money than it has given back, so much is clear, but that won't prevent it from paying out grossly $500.000 per employee (an amount that may vary depending on how many toilet attendants you’d add in) in a year that has already seen 2.5 million jobs lost in the nation, and we're only halfway through.

It would be one thing if Goldman and JPMorgan would have escaped the crisis, and applied real smart -legal- techniques to make a killing in the face of adversity. They haven't. They can stand up straight the way they do today, they can pay their hefty salaries (hefty in the real world), simply and only because the tax revenues collected from the people who are now thrown out on the street, both at their jobsites and at their homes, have been used to prop up Goldman but not the very people who've paid those taxes.

There is something so inherently wrong about this that there is no chance at all that it will turn out good. We're not talking some kind of honest mistake here.

There may be people, more like lost souls, in Washington, who actually believe that banks need to be saved ahead of people, that the sky would fall if Goldman would be no more. But the vast majority of them know very well that that is not true. They use the money that belongs to the millions, who have typically voted for them, to secure their own power positions.

This is a very fundamental issue. And there's no chance of changing it until you change the entire system. Which looks very, and increasingly, unlikely. It's much easier to "believe" that whoever you voted for will change it for you. Which they won't do, because it would endanger the power they have given up -the rest of- their lives and all of their innocent childhood dreams for.

As far as I can see, the growing indifference, the desensitization, about the numbers of unemployed and foreclosed upon fellow Americans is right up there with the refusal to see what government and Congress are really up to. Our perception of reality is not some constant factor. The only thing constant about it is that it changes constantly. You don't have an opinion, it is being custom-made for you day by day. Political campaign managers and main stream media leaders know this, be it consciously or unconsciously.

And if they convey the message in the approprite fashion, they know you will accept it, and even make it your own. Yes, even if that hurts every single one of your own personal interests. You're made that way, you want to belong.

Don't feel bad in your miserable poverty. Think of the greater good. You're saving the system that made you poor. Surely, that's a small price to pay.

U.S. foreclosure filings hit a record in the first half, a sign that job losses and falling property prices deepened the housing recession, according to RealtyTrac Inc. More than 1.5 million properties received a default or auction notice or were seized by banks in the six months through June, the Irvine, California-based seller of default data said today in a statement. That’s a 15 percent increase from the year earlier. One in 84 U.S. households received a filing.

"People are losing their jobs, seeing their income go down and are underwater on their mortgage," Richard Green, director of the Lusk Center for Real Estate at the University of Southern California in Los Angeles, said in an interview. "It’s a toxic combination." Home prices in 20 major U.S. metropolitan areas dropped 18.1 percent in April from a year earlier, according to the S&P/Case-Shiller index. The unemployment rate rose to 9.5 percent in June, the highest since 1983, bringing the total number of lost jobs to about 6.5 million since the recession started in December 2007, the Labor Department said.

Defaults by subprime borrowers with poor credit histories spurred the housing recession and spread to prime borrowers as home prices and sales declined. The Mortgage Bankers Association said May 28 that prime fixed-rate home loans to the most creditworthy borrowers accounted for 29 percent of new foreclosures in the first quarter, the biggest share of any type of loan. One in eight Americans is now late on a payment or already in foreclosure, the Washington-based mortgage group said.

Twenty of the 50 U.S. counties with the highest foreclosure rates were in California and 12 were in Florida, RealtyTrac said. Clark County, Nevada, home to Las Vegas, had the highest rate in the nation with one in 13 households receiving a filing, according to RealtyTrac. Lee County, Florida, home to Fort Myers and Cape Coral, ranked second at one in 14. Three counties tied for third place at one in 15 households: Merced, California; Osceola, Florida; and Lyon, Nevada. Riverside, California ranked sixth; Nye, Nevada was seventh; and San Joaquin, San Bernardino and Stanislaus, all in California, ranked eighth through 10th, RealtyTrac said.

"I don’t see any turning of the tide," said Donald Haurin, an economics professor at Ohio State University in Columbus. "The effect of more foreclosures will be continued downward pressure on house prices, and lead to difficulty making mortgage payments that are continuing to reset." Payment-option adjustable rate mortgages will contribute to higher defaults, said Rick Sharga, executive vice president of RealtyTrac. Option ARMs allow borrowers to pay less than the interest they owe each month, tacking on the difference to their total debt and creating the potential for bigger bills in the future.

About three quarters of those loans will adjust to require higher payments next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, according to data from First American CoreLogic of Santa Ana, California. Government and lender-supported plans to help troubled homeowners -- including President Barack Obama’s $275 billion pledge to jumpstart sales and encourage banks to modify sour loans -- have had little effect, Haurin said.

As many as 3.2 million U.S. households will get a foreclosure filing by the end of the year, Sharga said. "Stemming the tide of foreclosures is a critical component to stabilizing the housing market, so it is imperative that the lending industry and the government work in tandem to find new approaches to address this issue," James Saccacio, RealtyTrac’s chief executive officer, said in the statement. More than 8.3 million U.S. mortgage holders owed more than their homes were worth and an additional 2.2 million borrowers will be "underwater" on their loans if prices decline another 5 percent, First American said March 4.

Foreclosure filings in the second quarter totaled a record 889,829, up 11 percent from the first quarter and up 20 percent from a year earlier, RealtyTrac said. June filings were 336,173, the third highest monthly total in records going back to January 2005. Nevada had the highest foreclosure rate in the first half, with one in every 16 households receiving a filing, RealtyTrac said. A total of 68,708 properties were affected, 61 percent more than in the first half of 2008. Arizona had the second highest rate, one in 30 households; Florida was third at one in 33; and California ranked fourth at one in 34.

Other states in the top 10 included Utah, Georgia, Michigan, Illinois, Idaho and Colorado. California led in total filings with 391,611, an increase of 15 percent from a year earlier; followed by Florida at 268,064 for a 42 percent increase, RealtyTrac said. Arizona was third with 89,799 filings, up 55 percent, and Illinois was fourth with 68,932, up 29 percent. Other states in the top 10 for their sheer number of foreclosures and defaults were Nevada, Michigan, Ohio, Georgia, Texas and Virginia, said RealtyTrac, which collects data from more than 2,200 counties representing 90 percent of the U.S. population.

Relentlessly rising unemployment is triggering more home foreclosures, threatening the Obama administration's efforts to end the housing crisis and diminishing hopes the economy will rebound with vigor. In past recessions, the housing industry helped get the economy back on track. Home builders ramped up production, expecting buyers to take advantage of lower prices and jump into the market. But not this time. These days, homeowners who got fixed-rate prime mortgages because they had good credit can't make their payments because they're out of work. That means even more foreclosures and further declines in home values.

The initial surge in foreclosures in 2007 and 2008 was tied to subprime mortgages issued during the housing boom to people with shaky credit. That crisis has ebbed, but it has been replaced by more traditional foreclosures tied to the recession. Unemployment stood at 9.5 percent in June and is expected to rise past 10 percent and well into next year. The last time the U.S. economy was mired in a recession with such high unemployment was 1981 and 1982. But the home foreclosure rate then was less than one-fourth what it is today. Housing wasn't a drag on the economy, and when the recession ended, the boom was explosive.

No one is expecting a repeat. The real estate market is still saturated with unsold homes and homes that sell below market value because they are in or close to foreclosure. "It just doesn't have the makings of a recovery like we saw in the early 1980s," says Wells Fargo Securities senior economist Mark Vitner, who predicts mortgage delinquencies and foreclosures won't return to normal levels for three more years. Almost 4 percent of homeowners with a mortgage are in foreclosure, and 8 percent on top of that are at least a month behind on payments — the highest levels since the Great Depression.

Because home values have declined so dramatically, many people can't refinance. They owe far more to the bank than their properties are worth. To combat the foreclosure crisis and help stabilize home prices, President Barack Obama launched an effort in March to help 9 million people avoid foreclosure by helping them refinance or modifying their loans to lower their payments. But that's of no help to people who can't even afford the lower payments because they're making much less money or have lost their jobs altogether.

As of early July, about 160,000 borrowers were enrolled in three-month trials of loan modifications under the plan, according to preliminary figures from the Treasury Department. Meanwhile, more than 1.5 million American households were threatened with losing their homes in the first six months of this year, foreclosure listing service RealtyTrac Inc. said Thursday. Last week, Treasury Secretary Timothy Geithner and Housing Secretary Shaun Donovan outlined their frustrations in a letter to 27 mortgage companies, saying the industry needs to "devote substantially more resources to this program for it to fully succeed."

While high-level pressure on the mortgage industry could help, "There's nothing there that's going to help people who don't have jobs," said Jay Brinkmann, chief economist with the Mortgage Bankers Association. Just ask anyone in Rockford, Ill. Over the last generation, the blue-collar city of about 157,000 northwest of Chicago has struggled to attract jobs as auto suppliers, aerospace companies and machine shops closed. Today, unemployment runs at more than 13 percent.

Robin and Thomas Lewis, who live there, once earned a combined $100,000. But he lost his job in shipping and receiving at a robotics company, and she had to close her at-home day care business. They are staring at an October deadline for foreclosure. Their water service was cut off in February because they couldn't afford to pay the bill. Since then, they and their two teenage sons have been showering at the homes of friends and family and filling up gallon jugs of water to drink at home.

Robin Lewis, 41, found a job as a cashier at Wal-Mart and is taking night classes in hopes of becoming an accountant. Her 43-year-old husband got a job through a temp agency working as a machine operator. "At least now we have some income coming in," Robin Lewis said. She hopes it's enough to persuade the mortgage company to modify their 30-year fixed-rate loan. They are meeting with a housing counselor next week to work on their application for a loan modification.

Around the country, the relationship between rising unemployment and foreclosures is growing. An Associated Press analysis of more than 3,100 U.S. counties found a much stronger link between foreclosure rates and unemployment this year than in 2007. According to April figures, some of the highest unemployment rates in the country are in California cities like Merced, Modesto and Fresno that have been struck hardest by the foreclosure crisis. In those areas, home prices have been cut in half. Even in areas where unemployment is lower, borrowers are struggling.

Claudia Escobar, a 44-year-old single mother in Clifton, Va., lives in a cozy three-story brick town house on a tree-lined suburban street about 25 miles west of the nation's capital. A combination of family health problems and the loss of her $50,000-a-year job at an accounting firm have made it impossible to make her $900 mortgage payment. She has staved off foreclosure so far and hopes to land a job while her lender evaluates her application for a loan modification. Her 14-year-old son, Tommy, broke down in tears when he found out that his mother lost her job. "That has to be the most devastating point since we lived here," she said, sobbing. "He keeps asking me every now and then if we're going to lose the house."

The number of Americans filing claims for unemployment benefits fell last week to the lowest level since January, depressed by shifts in the timing of auto plant shutdowns. Initial jobless claims dropped by 47,000 to 522,000, lower than forecast, in the week ended July 11, from a revised 569,000 the prior week, the Labor Department said today in Washington. The number of people collecting unemployment insurance plunged by a record 642,000, also reflecting seasonal issues surrounding the closures at carmakers.

A Labor analyst said the distortions may play havoc with claims data for another couple of weeks. General Motors Co. and Chrysler Group LLC accelerated shutdowns this year heading into bankruptcy, months before the traditional July closings. Through the gyrations, job losses may subside amid signs the housing and manufacturing slumps are easing. "The automotive industry shutdowns have occurred and they aren’t occurring when the seasonals expected them to," said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. "We ought to see in the next couple of weeks claims come back to something resembling an underlying trend" in the 600,000 range, he said.

Stocks were little changed in early trading in New York and 10-year Treasury notes gained, pushing their yield down to 3.54 percent at 9:50 a.m. in New York from 3.61 percent late yesterday. Jobless claims were forecast to decline to 553,000 from an originally reported 565,000 the prior week, according to the median projection of 41 economists in a Bloomberg News survey. Estimates ranged from 480,000 to 605,000. Stock-index futures were lower and Treasury securities rose. Contracts on the Standard & Poor’s 500 Index fell 0.1 percent to 926 as of 8:45 a.m. in New York. Benchmark 10-year notes yielded 3.58 percent, down 3 basis points from yesterday.

Job cuts may be slowing after employers eliminated about 6.5 million positions since the recession began in December 2007, the most of any downturn since the Great Depression. Even so, hiring is limited and economists surveyed by Bloomberg project the jobless rate will exceed 10 percent by early 2010, restraining the consumer spending that accounts for two thirds of the economy. The four-week moving average of initial claims, a less volatile measure, dropped to 584,500 last week from 607,000.

Continuing claims dropped to 6.27 million in the week ended July 4 from 6.92 million the prior week. The unemployment rate among people eligible for benefits, which tends to track the jobless rate, plunged to 4.7 percent in the week ended July 4, from 5.2 percent the prior week. Twenty-six states and territories reported an increase in new claims for the week ended July 4, while 27 reported a decrease. These data are reported with a one-week lag. Initial jobless claims reflect weekly firings and tend to rise as job growth -- measured by the monthly non-farm payrolls report -- slows.

Federal Reserve officials expect the U.S. economy to contract less this year than they had anticipated in April, even as unemployment climbs to as high as 10 percent, according to their latest forecasts released yesterday."Most participants saw the economy as still quite weak and vulnerable to further adverse shocks," the central bank said in minutes of the Federal Open Market Committee’s June 23-24 meeting. Weekly jobless claims tend to be volatile at this time of the year, when automakers idle workers while they re-equip factories to build new models. Payrolls in June fell more than economists forecast and the unemployment rate reached 9.5 percent, the highest level since 1983, Labor said July 2.

GM, which emerged from bankruptcy this month as a majority government-owned carmaker, plans to end the year with 64,000 fewer workers in the U.S., a 30 percent decrease from Dec. 31, the Detroit-based company said this week. Other industries continue to trim workers. Lockheed Martin Corp., the world’s largest defense company, will cut 600 more jobs in New York following the cancellation last month of its contract to develop and build the next U.S. presidential helicopter.

The cuts will contribute to a 25 percent reduction in the total number of workers at the Owego facility to about 3,000 by the end of this year from 4,000 in January, spokesman Troy Scully said in an interview on July 14Advanta Corp., the credit-card company that stopped lending as defaults soared, plans to cut its workforce by about half after shutting off accounts for small-business customers. Advanta will have fewer than 200 employees after the reduction, the Spring House, Pennsylvania-based company said July 10 in a regulatory filing.

In California and a handful of other states, one out of every five people who would like to be working full time is not now doing so. It is a startling sign of the pain that the Great Recession is inflicting, and it is largely missed by the official, oft-repeated statistics on unemployment. The national unemployment rate has risen to 9.5 percent, the highest level in more than a quarter-century. Yet it still excludes all those who have given up looking for a job and those part-time workers who want to be working full time.

Include them — as the Labor Department does when calculating its broadest measure of the job market — and the rate reached 23.5 percent in Oregon this spring, according to a New York Times analysis of state-by-state data. It was 21.5 percent in both Michigan and Rhode Island and 20.3 percent in California. In Tennessee, Nevada and several other states that have relied heavily on manufacturing or housing, the rate was just under 20 percent this spring and may have since surpassed it.

Almost nobody believes that unemployment has finished rising, either. On Tuesday, President Obama said he expected it to "tick up for several months." It’s fair to say, then, that the downturn is moving into a new stage. It has already been through three: the prologue, when credit markets began to quiver in 2007; the big shock, when the collapse of Lehman Brothers, in September 2008, led into almost six months of terrible economic news; and the stabilization, when the news became more mixed.

Now comes Stage 4: the slog. "It’s not going to be an overnight turnaround," as Bernard Smith, an unemployed engineer in Greenville, S.C. (a state where the broader jobless rate was 20.5 percent this spring), who has been looking for work since May, told me. "It’s going to take time." Various indicators suggest the nation’s economic output could start growing again this summer, which would mean the end of the recession. But the economy will still be weighed down by troubled credit markets and huge household debts. So it may be awhile before growth is fast enough to persuade companies to hire large numbers of workers.

This would make for an odd contrast, in which the economy was getting better but feeling worse. These broad measures of unemployment and underemployment could approach a hard-to-fathom 25 percent in California, up from 12 percent a year ago. In several other states, including Florida, North Carolina and Washington, the rate could yet reach 20 percent — and, unfortunately, the stimulus bill does not do a good enough job of targeting the hardest-hit states. After a decade in which household income barely outpaced inflation, a slow recovery could leave many people hard-pressed and frustrated. In just the last week, the Labor Department reported that the number of people filing new claims for jobless benefits dropped — but so did consumer confidence and Mr. Obama’s approval rating. Welcome to the slog.•A jobless rate of 20 percent is clearly a bit shocking. It sounds like something out of the Great Depression, and as bad as this recession is, it’s no Great Depression. So what’s going on? For starters, this rate does include part-time workers who want to be full time. Such people are not quite unemployed or fully employed. On average, they are working three days a week, and many are struggling to get by. Richard Smith (not related to Bernard) and his wife, Lynn, for example, moved from Michigan to Charlotte, N.C., last summer, after he had been laid off from white-collar jobs by both Ford and General Motors in the last five years. But after talking with 35 headhunters and sending out hundreds of applications, Mr. Smith, who’s 58, still hasn’t found full-time work.

Instead, he works a few days a week at a golf shop, repairing clubs and making $9.50 an hour. The money has helped the Smiths buy a bargain-basement foreclosed house. "You get depressed, obviously," he said. "But that never changes my attitude about my capability." Part-time workers like Mr. Smith make up about one-third of those counted in the broader rates, which leaves roughly 13 percent of the work force in states like Oregon and Michigan who are completely out of work.

And even that is probably an understatement, because it includes only people who have looked for work at some point in the last year. (To be counted in the official jobless rate, someone must have looked in the last four weeks.) Anyone who has spent time in old industrial areas knows that plenty of former factory workers would like a decent-paying job but haven’t looked for one in more than a year. When I saw these statistics last week, my first reaction was to wonder why there weren’t more tangible signs of joblessness. Many communities are pockmarked with foreclosure signs and postponed construction projects. But unless you go looking for the unemployed, they are mostly invisible.

As Susan Rose — a lawyer at a nonprofit group in South Carolina who represented the unemployed until she herself was recently laid off — said, "It’s almost as if unemployed people are a forgotten, silent crowd." The stimulus bill is helping somewhat. It has extended jobless benefits and prevented layoffs by state and local governments. A lot more stimulus is on the way, too. So far, about $90 billion has gone out the door, according to Moody’s Economy.com. From now until the end of 2010, an additional $25 billion or so will be spent every month.

But the stimulus isn’t helping as much as it could, because too much of the money is going to states that need it the least. In most of the Great Plains and Mountain West, the broad jobless rate was still below 12 percent this spring. In North Dakota, it was 7.8 percent. Yet these are some of the places receiving a disproportionate share of stimulus, as recent articles by The Associated Press and The Times have shown. It’s a classic case of politics trumping economics.

Barring an unexpected bit of bad news — something that turns the slog into a relapse — Congress and the White House are not likely to pursue another stimulus bill until September. By then, more of the money from the last stimulus will have been spent, and the economy’s condition will be clearer. If lawmakers do decide more is needed, they would do well to remember that this is not an equal opportunity recession. By September, one out of every four Californians — and Oregonians and South Carolinians and Michiganders — who would like to have a full-time job might not have one. Who ever thought we would be saying such a thing?

The World Bank has given warning that global economy will fall into a "deflationary spiral" unless urgent action is taken to reduce high levels of excess capacity in industry. Justin Lin, the bank’s chief economist, said factories running idle around world threaten to trap economies in a vicious cycle, risking further spasms of financial stress, requiring yet more rescue packages. "Significant excess capacity has been built up and unless this issue is addressed, we will face a deflationary spiral and the crisis will become protracted," he told an audience in Cape Town.

Mr Lin said capacity use had fallen to 72pc in Germany, 69pc in the US, 65pc in Japan, and as low as 50pc in some developing countries, mostly touching lows not seen in modern times. The traditional cure for countries caught in slumps is to claw their way back to health through devaluation, but this cannot be done today because the crisis is global. "No country can count on currency depreciation and exports as a way out of recession. Unless we deal with excess capacity, it will wreak havoc on all countries. There is urgent need for global, co-ordinated fiscal stimulus," he said.

Investments should be focused on infrastructure in poor countries that are bearing the brunt of the crisis. The downturn is already likely to trap over 50m more people in extreme poverty this year. Mr Lin said some $30 trillion has been wiped off global stock markets and a further $4 trillion off US house prices, creating powerful deflationary headwinds. While emergency measures have eased the financial crisis, they have not stopped it turning into a deeper "real economy" crisis entailing mass lay-offs.

The comments came as the Bank of Japan agreed to extend its quantitative easing (QE) policies – mostly the purchase of corporate debt – and warned that business investment is "declining sharply". Headline inflation has dropped to minus 1.1pc. Michael Taylor at Lombard Street Research said Japan has been too timid, repeating the error of its Lost Decade when it failed to carry out QE on a sufficient scale. "Japan is already back in deflation, and it is here to stay. This year the economy will shrink by around 7pc, dramatically increasing the output gap and intensifying deflationary pressures. Cash earnings are down 3pc in the last year,"

The Bank of Japan downgraded its growth forecast, predicting that the economy will contract 3.4pc in the fiscal year to next March. This follows a catastrophic fall in output at a 14.2pc an annual rate in the first quarter, the worst ever recorded. While industrial output has bounced over the summer, there are concerns that it may have been flattered by an "inventory rebound" as companies rebuild stocks. Eurostat confirmed on Wednesday that the eurozone has slipped into deflation. Prices fell 0.1pc in June.

The economy won't start to recover until 2010 (versus the current consensus of now). It will recover because the government will be forced into a second stimulus.

The US consumer rules the world...and the US consumer is cutting back fast

Consumer spending will drop from 70% of GDP to 60% as consumers pay down debt and go on a saving spree.

Most recessions have a positive quarter or two of GDP, so if we get one, it won't mean anything.

The S&P will plunge 35% to 600 by the end of the year.

Buy Treasuries, Dollars

But isn't inflation going to turn dollars and Treasuries into toilet paper? That's what everyone's saying. They're wrong, says Gary. It's deflation we have to worry about. For the next 10 years, we're going to have chronic deflation, and the economy is going to grow at a paltry 2% per year.

Last week a story which gained very little traction hit the financial newswires. The U.S. Treasury is working on an internal project informally called “Plan C” which seeks to deal with further problems in the economy before they occur. The anonymous report came out stating the administration is reluctant to commit any additional money especially to the level mentioned in the report. However this is a disturbing new development in our bailout nation since this is one of the first times that the U.S. Treasury will try to preemptively deal with a financial problem.

The issues with this Plan C is that it is setup to be a buffer on further deterioration in various loan categories but the big one is commercial real estate. The commercial real estate market is gigantic and many of those loans are still active:

Some $3.5 trillion in commercial real estate loans are out in the market. The problem is complicated because commercial real estate holders simply rollover their debt into new loans. That of course has changed since the economy and credit markets have shutdown and many of these properties are now severely underwater. Take a look at how many loans will be turning over:

*Source: ZeroHedge

The amount of maturing loans in commercial real estate will double in 2010 and will continue upward into 2010. The chart is very clear and this is only for debt in CMBS and not held by regional banks which is over $2 trillion. This is the next multi-trillion dollar bailout you have yet to hear about. In fact, while many are discussing a second half recovery higher up officials are already planning a bailout for the commercial real estate industry. The challenge with this bailout is you are asking a public with 26,000,000 unemployed and underemployed Americans to shoulder the debt of largely speculative plays. To many it is palatable to bailout the residential real estate market because the public can understand that (even if it may be wrong) or bailing out the 2 large U.S. automakers. Yet bailing out the commercial real estate market is going to be a political nightmare.

Of course the U.S. Treasury would like you to believe this is merely a precaution but most of the last precautions we have heard about have turned out to be trillions and trillions in full on commitments shouldered by the American public:

The officials in charge of Plan C — named to allude to a last line of defense — face a particular challenge in addressing the breakdown of commercial real estate lending.

Banks and other firms that provided such loans in the past have sharply curtailed lending.

That has left many developers and construction companies out in the cold. Over the next few years, these groups face a tidal wave of commercial real estate debt — some estimates peg the total at more than $3 trillion — that they will need to refinance. These loans were issued during this decade’s construction boom with the mistaken expectation that they would be refinanced on the same generous terms after a few years.

The credit crisis changed all of that. Now few developers can find anyone to refinance their debt, endangering healthy and distressed properties.”

The end of the road has been reached for commercial real estate. Many regional banks jumped into the commercial real estate market since they had little chance of competing with big subprime and Alt-A mortgage factories like WaMu or Countrywide. Many regional banks saw this as a way to stay competitive in local regions across the country. This is a much more diverse problem and the tentacles of the commercial real estate bust will be felt in every state.

These loans were made on strip malls, doctor’s offices, and drive-through restaurants for communities that are hurting from the recession. This is an enormous amount of debt that is out there that will surely default since there is no way to refinance this debt since many of these projects are literally underwater. Take a look at the composition of over 8,000 banks and thrifts across the country:

Factoring in construction and commercial loans you arrive at a stunning 26 percent of all loans in FDIC banks and thrifts. This is a staggering figure and the U.S. Treasury is well aware of this. The question isn’t whether there will be major defaults here but who will shoulder the cost? So far, each consecutive bailout has largely been taken up by the U.S. taxpayer. The problem of course is the cost of all these bailouts will eventually catch up through a tanking dollar and possibly the long-term viability of our economy. Plan C is a preemptive bailout on an entire industry. The reason the government is devising a plan is that these loans will start going bad in large amounts and they are gearing up on a process of dumping this large mess on the American people. Yet it is going to be a politically hard sell for many to bailout a strip-mall from some large developer.

And make no mistake, the market for commercial loans is all but closed:

You are reading the above graph correctly. In the 1st quarter commercial loans fell by a stunning 50 percent on a quarterly basis. And the amount of bad loans is only growing:

The U.S. government’s program to jumpstart commercial real-estate lending will probably fail to produce any debt sales for a second straight month, thwarting efforts to revive the market for bonds backed by hotels, shopping malls and offices. While there will likely be no new issuance for July, deals should materialize by October, Alan Todd, an analyst at JPMorgan Chase & Co., said in a telephone interview. The Federal Reserve’s effort to breathe life into the $700 billion commercial mortgage-backed bond market is being hampered as lenders balk at originating new loans with no way to guard against price swings on the debt.

Building a pipeline of commercial mortgages to bundle and sell as securities takes several months, and banks are unwilling to risk holding them on their books without a means to protect themselves from price declines, said Christopher Hoeffel, a managing director at Investcorp International Inc. in New York. "The problem needs to be solved to restart the market," Hoeffel said in a phone interview. "The government efforts are commendable, but they don’t get us all the way there."

Investors were able to get loans from Fed’s Term Asset- Backed Securities Loan Facility starting in June to purchase newly issued commercial mortgage-backed bonds. There were no sales under the program last month.The Fed will announce later today how much it received in loan requests to purchase the debt for July, the first month investors could get loans to purchase older securities backed by commercial mortgage-backed bonds. Standard & Poor’s has started to cut the ratings on top- ranked commercial mortgage bonds, disqualifying the securities for the part of the program that finances so-called legacy assets, or bonds sold before Jan. 1. S&P said it my lower the ratings on $235.2 billion of the bonds.

Reluctant lenders aren’t the only ones holding up new issuance, according to Dan Gorczycki, a managing director of Savills, a real-estate investment banking firm based in New York. Loan servicers are increasingly giving extensions to borrowers in hopes conditions will improve, bringing activity to a standstill and damping the demand for new loans, Gorczycki said. "Everybody has got their head in the sand," Gorczycki said in an interview. Two-thirds of loans bundled and sold as securities, or about $410 billion, may have trouble refinancing maturing debt, and may have to put more cash into the property as values plummet and underwriting standards tighten, according to Richard Parkus, a Deutsche Bank AG analyst.

Generating new loans and averting a wave of foreclosures as borrowers fail to refinance maturing commercial mortgages is a cornerstone of the Fed’s effort to cleanse bank balance sheets and enable lending. Sales of commercial mortgage-backed bonds plummeted as the cost to sell the bonds became too high to originate new loans, choking off financing to borrowers. A record $237 billion in commercial mortgage-backed debt was sold in 2007, compared with $12.2 billion last year, according to JPMorgan. There have been no sales so far in 2009.

The U.S. economy may pull out of a recession by the end of the year and a second stimulus package would help broaden the recovery, said Nouriel Roubini, the New York University professor who predicted the financial crisis. "The free fall of the economy has stopped," Roubini said at a Chilean investors’ conference in New York. "The economy is still contracting but slowly." To help shore up growth, a second spending package may be needed by late 2009 or early 2010 totaling between $200 billion and $250 billion, Roubini said.

"We should continue with fiscal stimulus and we might need a second one," Roubini said. While the worst of the crisis is over, there’s still a "meaningful amount of weakness" in labor markets, industrial production and housing, he said. China, India and Brazil are among economies that may recover faster once the global economy picks up, Roubini said. He also mentioned Chile, Uruguay, Colombia and Peru as countries better-positioned to grow, in an interview at the conference. Countries in emerging Europe such as Hungary, Bulgaria and Ukraine face the biggest challenges, he said.

Moody’s has issued the first in a series of Special Comments looking at whether and how fast (or rather, how slowly) various sectors of the economy are recovering. Focusing on corporates, it contains an overview of the economy and coverage of the following global industries: autos, base metals, chemical, consumer durables, homebuilders, media and entertainment, oil and gas, packaging, retail, steel, and transportation.Moody’s answers some of the following questions for each of these industries:

How is the credit picture different than it was a few months ago?

Have conditions stabilized? Are they beginning to improve?

Is improvement in credit conditions well-established or precarious?

Why haven’t credit conditions gotten better?

What has to happen to improve credit conditions further?

Moodys.com Chief Economist Mark Zandi writes that "Another round of fiscal stimulus may also be warranted. The current stimulus, which includes aid to state governments and unemployed workers, tax cuts and increased infrastructure spending, has not yet had time to work and it may very well succeed. It is no accident that the recession will wind down in the next few months as the stimulus payout ramps up. The impact on jobs and unemployment should show up more clearly later this year and early in 2010."

However, given how surprisingly severe this economic downturn has been, it is only prudent to consider the need for even more temporary tax cuts and spending increases for next year. -Mark Zandi, Chief Economist, Moody’s.com

"The Obama administration will almost certainly have to significantly adjust its response to the foreclosure crisis, Zandi adds. " Foreclosures continue to surge, weighing heavily on already crashing house prices. As long as house prices are falling and undermining household wealth and the financial system’s capital base, a self-sustaining economic recovery will not take hold. For foreclosures to abate and house prices to stabilize anytime soon, policy efforts to mitigate foreclosures through loan modifications must soon begin to work more effectively. To date, the Obama administration’s foreclosure mitigation plan has not had a meaningful impact."

International demand for long-term U.S. financial assets weakened in May as investors sold the most Treasury notes and bonds in six months. Total net sales of long-term equities, notes and bonds were $19.8 billion in May, compared with net purchases of $11.5 billion a month earlier, the Treasury said today in Washington. Net selling of government notes and bonds totaled $22.6 billion, the most since sales of $25.8 billion in November, after net buying of $42 billion in April.

As investors abroad dumped long-term Treasuries, purchases of U.S. stocks in May were the strongest pace since January 2008. The Obama administration is selling a record amount of government debt to finance a budget deficit that’s projected to approach $2 trillion this year, raising concern about American fiscal policy and spurring purchases of shorter-term U.S. debt. "There is great worry regarding overseas holdings of U.S. Treasuries," said Dan Greenhaus, an analyst at Miller Tabak & Co. in New York, in a report to investors after the report was released. Total monthly foreign investment flows dropped $66.6 billion in May, compared with a decline of $38 billion in April.

The report showed $21.8 billion in net sales by foreign governments of Treasury notes and bonds in May, while the same group of official investors purchased Treasury bills totaling a net $55.6 billion. Bills have maturities of a year or less. China, the biggest foreign holder of U.S. Treasuries, increased its holdings of government notes and bonds by $38 billion to $801.5 billion. Holdings in Hong Kong also increased. Japan, the second-biggest international investor, reduced its total by $8.7 billion to $677.2 billion. Russia’s holdings fell $12.5 billion to $124.5 billion. Holdings at Caribbean banking centers also fell, declining by $9.9 billion to $194.8 billion. Analysts had anticipated international net purchases of long-term U.S. assets of $16.5 billion, according to the median of five estimates in a Bloomberg News survey.

Net purchases of American equities rose $16.7 billion in May after rising $4.6 billion the prior month. The Standard & Poor’s 500 Index jumped 5.3 percent in May, the third straight month of increases. The Treasury’s reporting on long-term securities captures international purchases of government notes and bonds, stocks, corporate debt and securities issued by U.S. agencies such as Fannie Mae and Freddie Mac, which buy home mortgages. Foreign investments in U.S. agency debt increased by $12.8 billion in May, after net selling in six of the prior seven months. Holdings of corporate bonds increased a net $935 million, today’s report showed.

The U.S. budget deficit topped $1 trillion for the first nine months of the fiscal year and broke a monthly record for June as the recession subtracted from revenue and the government spent to rejuvenate the economy. The shortfall for the fiscal year that began Oct. 1 totaled $1.1 trillion, the first time that the gap for the period surpassed $1 trillion, Treasury figures showed July 13 in Washington. The excess of spending over revenue for June was $94.3 billion, the first deficit for that month since 1991, according to data compiled by Bloomberg. For the fiscal year that ends Sept. 30, the Office of Management and Budget forecasts the deficit to reach a record $1.841 trillion, more than four times the previous fiscal year’s $459 billion shortfall.

Chinese Premier Wen Jiabao expressed concerned earlier this year that his country’s Treasury holdings may fall in value as the U.S. sells record amounts of debt to fund the budget gap. President Barack Obama is counting on nations such as China to fund his $787 billion economic stimulus and separate programs to aid financial firms and homeowners amid the worst downturn since World War II, which has cost about 6.5 million jobs. Treasury Secretary Timothy Geithner has sought to reassure investors such as China that their investments in Treasuries are safe, while also seeking to reassure U.S. voters that the government has a plan to get its debt under control.

Geithner, at the end of a trip this week to the Middle East and Europe, said the Obama administration favors a strong dollar and expressed confidence it will stay the world’s main reserve currency. "We support a strong dollar," Geithner said in an Internet chat with Les Echos newspaper in Paris. "The dollar will remain the principal reserve currency. The dollar’s role in the international financial system places special responsibilities on the United States, to sustain confidence in our financial system, to bring our fiscal deficits down when recovery is in place, and to preserve the Fed’s strong record of price stability."

Meanwhile, a People’s Bank of China economist wrote in the China Securities Journal yesterday that China should "moderately" increase its holdings of U.S. Treasuries and purchases this year should not be lower than the total for 2008. The holdings can be trimmed and purchases of other types of U.S. assets stepped up once the American economy recovers, Wang Yong, a professor at the central bank’s Zhengzhou-based training school, wrote in an article in the Xinhua News Agency-affiliated newspaper.

China and other nations with large dollar reserves should hold negotiations with the U.S. government on how those funds can be injected into the world’s largest economy, and those talks should include the possibility of shifting bond holdings into other assets such as stocks and gold, Wang wrote. Russian President Dmitry Medvedev who first questioned the dollar’s future last month, saying it isn’t "in a spectacular position, let’s be frank, and its prospects cause various questions," handed out coins at the July 10 G-8 meeting in Italy bearing the words "united future world currency."

Via Consumerist.com (which, trust me, in these economic times is a site you need to have bookmarked) comes this lovely video from American Public Media's Marketplace, in which senior editor Paddy Hirsch explained exactly what's been going on with those toxic assets that we've heard so much about.

Hirsch does a really lovely job explaining the matter, with an analogy to Thanksgiving gravy. See, about a year ago, the securities market looked like delicious gravy. But guess what happened? Precipitation or flocculation or whatever the term is for when the layer of fat settles out of solution at the top of the gravy. The fat is the "rubbish" that no one wants to buy. The upshot: reports of rosy bank balance sheets don't take into account the glistening, thick slab of nast that's making its way to the bottom of the gravy tureen as the good stuff is poured out.

Anyway, Hirsch goes on to discuss the actions that banks can possibly take to dispose of their toxic assets and the dangers that the toxic assets still pose, but I won't spoil the ending by disclosing what happens to Dumbledore or whatever. The salient point is that this is delightful, and hopefully Hirsch will do another one comparing credit-default swaps to haggis.

When Lance Uggla, an entrepreneurial bond trader, created Markit back in 2001, he could have had little inkling that it would one day enter the US political spotlight. Back then, the business had barely a dozen staff working out of a barn in St Albans, or the bottom of Mr Uggla’s garden. Its area of interest seemed dull to most outsiders: Markit collates data from banks on trade flows and prices in the over-the-counter credit world, and sells it back to the market, mostly for valuation purposes.

But the days of innocent obscurity are over. The Department of Justice this week confirmed that it had started an investigation into pricing practices in the credit derivatives markets. It has demanded extensive data from Markit and the dozen-odd banks that own it, a request with which Markit is complying – out of swanky offices in London and New York. What triggered the DoJ probe is – like the credit markets – a touch murky. Some bankers think the DoJ is flexing its muscles in the new political landscape by demonstrating a tough interpretation of the so-called "Sherman" anti-competitive doctrine. Others fear that the exchanges and some hedge funds are leaning on the DoJ as part of a campaign to move credit default swap activity on to exchanges.

There may be a simpler explanation. In recent months the DoJ has had reason to look at the credit derivatives world because of a flurry of corporate activity. Most notably, efforts are under way to create clearing platforms and Markit is creating a joint venture. As the DoJ peers into this once-geeky world, it is not surprising if it thinks some of those practices look a touch odd – at least given the mood of the times. The essential problem is that growth in these markets has been so frenetic in recent years that activity has outgrown the infrastructure, in a logistical, political and social sense.

Take the case of pricing. When Markit sprang to life in its barn eight years ago, the credit derivatives market was so young it operated like the banking equivalent of a hunter-gatherer tribe. A few investors and bankers roamed about, cutting credit derivatives deals between themselves, in an ad hoc, decentralised manner. Markit’s appearance triggered an evolutionary leap, creating a more structured tribe. As it started gathering trade data from different banks and calculating average prices, it enabled the creation of communal benchmarks, which turned into indices, such as iTraxx, CDX or ABX.

Markit was not the only data-gathering group but it quickly came to dominate the field. And as it enjoyed this stunning success its role subtly changed. Most notably, the company stopped being a "camera" that merely reflected the market, and became an "engine" of growth (to use the metaphor coined by Donald MacKenzie, the academic). When Markit launched the ABX index of mortgage derivatives in early 2006, the sheer fact of having a way to track prices enabled the market to explode.

It is perhaps not surprising that some American observers started to snipe about the ABX – and Markit – when the turmoil erupted in 2007. Nor that the DoJ is questioning the wisdom of having Markit – and the dealers that own it – in such a powerful position in relation to data flows. For their part, the banks and Markit vehemently deny any wrongdoing. As far as I can tell, Markit seems a highly professional and well-run group. But the key problem is the evolutionary – or structural – one.

Eight years ago, the fact that any group was producing communal data on credit derivatives marked real progress for the markets, even if distribution of that data was controlled. Now, however, investors and politicians are no longer happy with just having a well-organised tribe. They want the financial equivalent of democracy: data that is available to all, or produced through open, competitive means, not just sold to a few paying banks and investors. It is a fair bet that the banks will keep fighting this trend. After all, if the tribal elites – aka the dealers – lose control of trade flows and price data, their profits will suffer. Hence it is entirely possible the banks will win this fight, given their political muscle.

But it is also easy to imagine a scenario where the DoJ probe turns out to be a real tipping point that could finally break the dealers’ control over the markets. After all, at the start of this decade, few would have guessed that a start-up in St Albans would end up shaping the markets so much. What will happen in the next eight years – or eight months – seems even more unpredictable, given the battle under way, with or without that DoJ probe.

Fueled by a massive economic stimulus package and aggressive bank lending, China’s economy grew by 7.9 percent in the second quarter of this year, the government said Thursday, a surprisingly strong showing during the global economic downturn. The gross domestic product figures, released Thursday by the National Statistics Bureau in Beijing, suggest the country’s stimulus policies are working and that the government will meet the 8 percent growth target it set early in the year, analysts say.

While most other major economies are in recession or struggling with anemic growth, China appears to have turned a corner following a sharp slowdown at the end of last year and the beginning of this year, when the pace of growth in the country was cut in half. "This is a stunning recovery," said Andy Rothman, an economist at the brokerage firm CLSA in Shanghai. "And it’s also not just the government money fueling the recovery. The private sector is also recovering, and that’s the key."

After growing at a torrid pace of nearly 13 percent late in 2007, China’s growth dipped to 6.1 percent in the first quarter of this year, the slowest pace in a decade. Some analysts suspect growth during that period was even slower. But in recent weeks, analysts say they have begun to see signs of robust growth in the Chinese economy, including strong car and property sales, soaring commodity prices, long lines at ports and huge infrastructure projects.

"Demand for steel has rallied strongly in the last six months," said Jim Lennon, a London-based steel analyst at Macquarie Securities. "Many Chinese steel producers are now operating at full capacity. The Chinese are the only growth market for steel." While many countries may be relying on government-funded stimulus projects, China has turned to its state-owned banks, which have already made more than $1 trillion in loans this year.

"This recovery is much more reliant on bank lending," said Wang Tao, the chief China economist at UBS Securities. "In the last few months, the bank lending has been massive — beyond anyone’s imagination." Analysts say the dynamics of the economy have begun to shift slightly this year, away from the once-booming coastal provinces and toward less developed regions in central and western China. But some analysts remain skeptical about China’s statistics, questioning whether the government is releasing overly rosy figures and masking serious troubles in the economy.

After dropping sharply in the early part of this year, exports have stabilized. But they are still struggling, analysts say. Analysts also point to weak electricity consumption figures and meager foreign investment as indications that growth may not be as strong as reported in official data. But many analysts say there are more signs of strength than of weakness, and that record bank lending is filtering through the economy and helping drive growth. "This is probably the only major economy in the world where manufacturing employment is rising," said Mr. Rothman of CLSA.

Most analysts are now forecasting strong growth for the second half of this year, at close to 9 percent from a year earlier. But there are risks emerging too. The government has already warned about wasteful government-spending projects, the possibility that overly aggressive lending could lead to a sharp increase in nonperforming loans and the threat of asset bubbles and inflation. Property prices are skyrocketing again in some parts of the country. And Shanghai’s stock market is up nearly 70 percent this year, after a huge drop last year.

Some experts say the stock market has been propped up partly by state-owned companies that are once again speculating on stocks rather than investing in their businesses. The government and many analysts are also worried about asset price inflation and the possibility that aggressive lending from state-owned banks will result in a raft of nonperforming loans in the coming years. "There are the two biggest worries for the government," said Ms. Wang of UBS Securities. "It’s impossible to make so many loans in such a short period and not have problems. Two or three years down the road, nonperforming loans could be a serious problem."

China’s GDP figures might show that the world’s third-largest economy is coming out of its funk. But few economists will take Thursday’s report at face value. While their caution is wise, the Middle Kingdom probably is recovering – tentatively. The country’s leadership has set a target of 8pc growth for 2009. Most economists believe the magic number will be hit, as do 88pc of investors in China, according to an ING survey. Reported growth in the first quarter was 6.1pc, and a 7.1pc "print" is expected for the second quarter, followed by above-trend growth in the second half.

But the GDP growth rate in China is too important a number politically to be reliable. From the bottom to the top of the data chain, everyone has a reason to report numbers that look politically correct. As economist Charles Goodhart pointed out, when leaders turn a measurement into a target, it stops being a good measurement. Still, simpler indicators also point to recovery. Car sales rose 37pc in June. Electricity consumption rose 3.7pc, reversing May’s decline. Production of steel, diesel, speciality chemicals and even fridges are all back at pre-downturn levels.

Exports are still falling, but a slower fall in imports suggests China's domestic consumption is recovering faster than that of its trade partners. None of these indicators is perfect. Sales can rise because prices are cut to unsustainably low levels. Industrial production counts what's made, not what's sold. And rising imports could be a sign of firms buying materials to make products that as yet have no buyers.

Either way, financial aid has certainly helped make this recovery, if there is one, look healthier. The central bank has pumped three times more money into the economy so far this year than in the same period last year. A record rise in the country’s foreign exchange holdings in June suggests speculative foreign money is now adding to the wall of liquidity. Whatever the GDP figures show, China remains an unbalanced economy. Real private consumption is immature. Only time can change that. The export engine remains dormant. Only a recovery in the US and Europe can get it moving. Over those things, Beijing has next to no control.

A split among Federal Reserve officials widened last month: Depending on who is doing the forecasting, economic growth will either remain stalled next year or will accelerate to the fastest rate since 1999. Minutes from the Fed’s June meeting show central bankers are less certain than they were in April over how the economy will emerge from the worst recession in a half century. Policy makers have differing assessments of how quickly credit markets will heal, and how effective a $787 billion fiscal stimulus and $1 trillion expansion of the Fed’s balance sheet will be, according to the Federal Open Market Committee’s minutes released yesterday.

"The committee as a whole lacks conviction about where the economy is going," said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. "Uncertainty has to make them slower to start warning about a turning point in policy." Central bankers left the benchmark lending rate in a range of zero to 0.25 percent last month and said the policy rate was likely to remain "exceptionally low" for an "extended period."The range of unemployment forecasts for 2010 widened in June to 8.5 percent to 10.6 percent, a 2.1 percentage point gap, from 8 percent to 9.6 percent in April.

The range of projections for 2010 growth showed a gap of 3.2 percentage points, up from a 2.5 percentage-point divide in April. The lowest forecast suggests the economy will grow just 0.8 percent from this year’s fourth quarter to the final quarter of 2010; the highest projects 4 percent growth. "Uncertainty just lends itself to standing pat," said Vincent Reinhart, former director of the Fed Board’s Monetary Affairs Division and a resident scholar at the American Enterprise Institute in Washington. "You have a committee in which a significant fraction have unreconciled views among themselves."

Policy makers were concerned that consumer spending will resume its decline once temporary benefits to household income from the fiscal stimulus subside, the minutes showed. Some officials also saw a danger of a renewed decline in the housing market, in part as mortgage rates increase. "Labor market conditions were of particular concern to meeting participants," the minutes said. "With the recovery projected to be rather sluggish, most participants anticipated that the employment situation was likely to be downbeat for some time."

At the same time, the FOMC concluded that it was best to keep its programs for purchasing Treasuries and mortgage debt unchanged. "The effects of further asset purchases, especially purchases of Treasury securities, on the economy and on inflation expectations were uncertain," the minutes said. Forecasts also show members divided over whether economic growth will exceed their estimates of its long-run potential of around 2.5 percent to 2.7 percent. The difference of opinion is important because growth above potential would push down the unemployment rate faster. Unemployment stood at 9.5 percent in June, the highest since August 1983, as employers eliminated 467,000 jobs.

Growth estimates from 10 FOMC members for next year clustered in ranges above 2.7 percent, while seven were in ranges of 2.5 percent or below. The split over whether the expansion will be fast enough to restore job growth, or too slow, will complicate policy leadership for Fed Chairman Ben S. Bernanke, analysts said. "The wide array of estimates for everything from inflation to growth and unemployment suggests that we really don’t know how this economy is going to unfold in coming months, let alone two years from now," said Richard Yamarone, director of economic research for Argus Research Corp. in New York. "Until some of these clouds dissipate, I can’t imagine the Fed is going to take these programs off the table or change its target rate."

Ilargi: Never thought I’d one day post Karl Rove, other than to make -totally undeserved- fun of certain classes of little droolings rodents that leave little drooling droppings. But here we are. Rove points out where Obama fails, and how both that failure and the opaque denials that followed are feeding the Roves and Palins in the country. This is getting serious.

So what's a president to do when the promises he made about his economic stimulus program fail to materialize? If you're Barack Obama, you redefine your goals and act as if America won't remember what you said originally. That's a neat trick if you can get away with it, but Mr. Obama won't. His words are a matter of public record and he will be held to them. When it came to the stimulus package, the president and his administration promised, in the words of National Economic Director Larry Summers, "You'll see the effects begin almost immediately." Now it's clear that those promised jobs and growth haven't materialized.

So Mr. Obama is attempting to lower expectations retroactively, saying in an op-ed in Sunday's Washington Post that his stimulus "was, from the start, a two-year program." That is misleading. Mr. Obama never said if his stimulus were passed things might still get significantly worse in the following year. In February, Mr. Obama said this about the goals of his stimulus package: "I think my initial measure of success is creating or saving four million jobs." He later explained the stimulus's $787 billion would "go directly to . . . generating three to four million new jobs." And his Council of Economic Advisors issued an official analysis showing that the unemployment rate would top out in the third quarter of this year at just over 8%.

That quarter began on July 1, and unemployment is now 9.5%, up from 7.6% when Mr. Obama took office. There are 2.6 million fewer Americans working than there were on the day Mr. Obama was sworn in. The president says now that unemployment will exceed 10% this year, and his advisers say it will remain high through much of next year. Earlier this year, Mr. Obama assured us that most of the stimulus money "will go out the door immediately." But it hasn't. Only about 7.7% of the stimulus has been spent in the six months since its passage, and more of it will be spent in the program's last eight years than in its first year. So now the president claims he said something different. "We also knew that it would take some time for the money to get out the door," Mr. Obama said in his weekly radio address on Saturday.

One problem with Mr. Obama's stimulus bill that is rarely talked about is that it will force a huge, and likely permanent, increase in discretionary, domestic spending. That portion of federal spending was $393 billion in President George W. Bush's last budget. Democrats immediately raised it to $408 billion for this fiscal year and now face the question of whether to make the stimulus a one-time expenditure or a permanent spending increase. Federal education spending is a good example. As part of the stimulus, Mr. Obama nearly doubled education spending to $80 billion from $41 billion. If Congress adds that and other stimulus spending into the baseline for future budgets, discretionary domestic spending could mushroom to $550 billion or $600 billion next year. If that happens, Mr. Obama will have broken his pledge that the stimulus would be temporary spending.

As is Mr. Obama's habit, he has answered his critics by creating straw-man arguments. In last weekend's radio address, he attacked detractors as those who "felt that doing nothing was somehow an answer." But many of Mr. Obama's critics didn't feel that way. They offered -- and Mr. Obama almost completely ignored -- constructive ideas to jump-start the economy. For example, House Republicans offered an alternative recovery package of immediate tax cuts and safety-net measures that cost half as much as Mr. Obama's stimulus program. Republicans have also calculated that their plans would have created 50% more jobs than the stimulus. They reached that estimate by using the same job-growth econometric model that the president's Council of Economic Advisors used for the stimulus.

While in Moscow recently, Mr. Obama answered questions on whether his administration had misread the economy by saying "there's nothing that we would have done differently." Let me suggest two things: He could have proposed pro-growth policies rather than ones that retard economic recovery with a massive increase in deficit spending. And he could fulfill his promise to speak to us honestly rather than selling his proposals with promises and goals he rapidly discards.

In his 1946 essay "Politics and the English Language," George Orwell wrote about words used in a "consciously dishonest way." "That is," Orwell wrote, "the person who uses them has his own private definition, but allows his hearer to think he means something quite different." Americans are right to wonder if their president is using his own private definitions for the words he uses to sell his policies.

So the CIT Group, the commercial lender, isn't getting a government rescue. CIT had sought permission to borrow with government backing, but was turned down. More recent negotiations were over a plan to permit CIT to transfer assets from its holding company to its bank in Utah. The Federal Reserve would open the discount window to CIT, allowing the bank to borrow money by pledging some of those assets at collateral.

Government officials reportedly worried that these moves may not be enough to stave off CIT’s demise. As early as yesterday, there was word that CIT might be pretty much unrescuable. The company already has $2.3 billion in TARP funds, but has still found itself on the brink of bankruptcy. CIT has $1 billion in bonds due in August and another $10 billion by the end of 2010. By that point, the government plans to have cancelled theTemporary Liquidity Guarantee Program, the FDIC guarantee on the bonds of financial firms.

"Even if CIT receives another round of support, we believe bondholders are not out of the woods," David Hendler, an analyst at CreditSights in New York, wrote prior to the news of the bailout tonight. "We believe CIT's funding model is broken and have our doubts over whether an additional capital injection would cure the problem." Many people (including us) argued that the lender should be allowed to fail, as a sign that the government would not continue to prop up failed companies. Others worried that a CIT bankruptcy would hurt the businesses that depend on CIT for financing.

Reportedly, a struggle had broken out between Treasury Secretary Tim Geithner and FDIC chair Sheila Bair. Geithner favored the rescue, citing dangers to small businesses. Bair opposed extending FDIC credit to the weak firm that many believe could fail without causing major systemic upheavals. While CIT and U.S. regulators worked through the night discussing details of a potential recue, a bank run was underway. Customers reportedly drained hundreds of millions of dollars from the lender in the past few days, drawing down on credit lines they had with CIT. The run seems to have been prompted by news over the weekend that CIT had hired lawyers to prepare for a bankruptcy filing.

The U.S. spurning of CIT Group Inc.’s aid request suggests officials are betting they’ve fixed the financial system enough to withstand the bankruptcy of a mid-sized lender. "I hate to say this, but it was probably expendable," said Dennis Santiago, chief executive officer of Institutional Risk Analytics, a Torrance, California, research firm that studies systemic risk. "It may have just missed the boat" on federal rescues, Santiago said.

Yesterday’s decision to forego a lifeline for CIT came 10 months after Lehman Brothers Holdings Inc. filed for bankruptcy. Lehman’s collapse ushered in the depths of the credit crisis to date, and resulted in the establishment of a $700 billion bailout fund; officials yesterday indicated programs created with that money would help fill any lending gap left by CIT. Treasury Secretary Timothy Geithner, en route to Paris as CIT acknowledged policy makers had turned it down, is also wagering the administration will weather any political fallout. Unlike Bear Stearns Cos. or American International Group Inc., which got extraordinary aid last year, New York-based CIT specializes in loans to smaller firms, counting 1 million enterprises, including 300,000 retailers, among its customers.

A Treasury official said the department anticipates losing the $2.3 billion of taxpayer funds that it had already injected into the company from the Troubled Asset Relief Program should it file for bankruptcy. There will be "a lot of disruption and anger among voters, particularly among people who rely on firms such as CIT for funding," said Sean Egan, head of Egan-Jones Ratings Co. in Haverford, Pennsylvania, which rates CIT below investment grade. "A major provider of capital in the middle market is likely to be out of business in the near future," and investors will be concerned, at least in the "short run" about CIT, Egan said.

CIT, whose stock trading was halted by the New York Stock Exchange before the close, said late yesterday it was told "there is no appreciable likelihood of additional government support being provided over the near term." CIT added that it was "evaluating alternatives" with its advisers. The Treasury then highlighted in a statement that the government has enacted "powerful" mechanisms to revive credit markets. "Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies," the department said.

An Obama administration official separately said CIT didn’t receive more government assistance because it hadn’t gone to private capital sources to rebuild its balance sheet, something that several of the biggest Wall Street and regional lenders did earlier this year. The official, who requested anonymity to discuss the deliberations, said the government also determined that CIT didn’t pose systemic risk to the economy if it failed to receive more aid.

Yesterday’s collapse in talks between regulators and CIT followed reluctance by the Federal Deposit Insurance Corp., the bank’s main regulator, to give it permission to participate in the agency’s debt-guarantee program.The Federal Reserve had separately considered whether to let CIT put some of its parent assets into a banking unit, a move that could have increased its potential borrowing from the central bank. No such aid was forthcoming. The Fed has doubled its balance sheet to more than $2 trillion as it engaged in Wall Street rescues and emergency loans to banks across the nation.

"If the government would have rescued them they would have been in there for a very long time, and they would have taken very big losses," said Eric Hovde, who manages $1 billion at Hovde Capital Advisors LLC in Washington, which concentrates on financial and real-estate related companies. Part of the Fed and Treasury efforts to shore up the financial markets have been directed at restarting lending to small businesses. The two agencies in March jointly started the Term Asset-Backed Securities Loan Facility, or TALF. Under the program, the Fed lets investors borrow to purchase securities backed by auto, credit-card and other loans, with the idea that should spur lenders to extend more credit.

TALF loans from the Fed totaled $24.9 billion as of last week, compared with the program’s planned capacity of $1 trillion, backed by $100 billion of funds from the $700 billion Troubled Asset Relief Program. Fed officials credit the existence of the TALF with spurring the market for new asset-backed securities and reducing the difference, or spread, between yields and benchmark rates. "So far, the evidence indicates that the program is working as designed," New York Fed President William Dudley said in a speech last month. Yield premiums on consumer asset- backed securities have dropped "sharply," he said.

The three-month London Interbank offered rate for the dollar, a benchmark for liquidity stresses among banks, has fallen every week since mid-March. The rate dropped to 0.51 percent yesterday from 1.43 percentage point at the start of the year. Other evidence of a stabilization in the financial industry emerged this week, with Goldman Sachs Group Inc. reporting record profits. The Standard & Poor’s 500 Financials Index has rallied 11 percent this week. Fed policy makers still regarded financial markets as "fragile" and the economy as "vulnerable to further adverse shocks," minutes of their June 23-24 meeting, released yesterday in Washington, showed.

The spurning of CIT comes amid a growing debate among officials, regulators, lawmakers and the financial industry over how to address the issue of firms deemed too big to let fail. President Barack Obama is seeking the biggest overhaul of banking rules in decades, and wants to give the Fed new powers to oversee capital and liquidity standards. FDIC Chairman Sheila Bair, along with some lawmakers and central bankers, has urged stronger efforts to address the too-big-to-fail issue.

Gary Stern, president of the Minneapolis Fed, said the Obama plan "fails to come to grips" with the challenge, partly because it doesn’t threaten creditors with the risk of loss. House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, plans a hearing on the matter July 21. CIT was created in 1908, after founder Henry Ittleson noticed wholesalers repeatedly short of cash while he was a purchaser for a St. Louis department store. He wanted to create a new company that would serve customers overlooked by larger financial institutions, according to the firm’s Web site.

"I’ve heard from a lot of people, including a lot of people involved in small business, that it would cause a serious problem" for CIT to fail, Frank said in an interview yesterday before the firm’s announcement. Among financial firms, "especially those on the edge, there’s going to be a scramble to figure out whether you’re in or out" of bailouts, said Joseph Mason, Louisiana State University finance professor. "This classification of systemic risk really is something like pornography -- Fed and Treasury know it when they see it. You really can’t pre-commit."

This week, Wall Street superpower Goldman Sachs announced second quarter net profits of $3.44 billion, far exceeding expectations. Earnings per share also rose, to $4.93 from $4.58 a year ago. This is a promising sign that the battered financial industry is on the mend, but it should be noted that Goldman didn’t do it alone. In fact, at least some of these profits were made possible by guarantees, low-cost loans and other assistance from the federal government.

But the financial giant continues to benefit from several government programs aimed at loosening up credit markets.

First, $13 billion of the government’s bailout of AIG went straight to Goldman, a 100% payoff of bets the firm had placed with the insurer. While industry insiders say that this was done to ensure that legally-binding contracts were upheld, others, including former New York AG Eliot Spitzer, argue that this was simply “a way to hide an enormous second round of cash to the same group that had received TARP money already.” This $13 billion was delivered despite Goldman’s continued insistence that it did not need government funding.

Goldman also benefited from artificially inexpensive debt thanks to the FDIC’s Temporary Liquidity Guarantee Program (TLGP). This program put a federal guarantee behind bonds issued by Goldman and other banks, including Bank of America and JP Morgan Chase, making them far more attractive to investors. For example, when Goldman sold $5 billion of 3.5 year bonds in November, it was able to attract buyers while offering a yield only 200 basis points higher than ultra-safe Treasuries with similar maturities. Altogether, Goldman issued $28 billion in debt using this program between November and April.

Mark Zandi, chief economist at Moody’s Economy.com, called this bond-guarantee program an infinite subsidy whose value could not be calculated.

Finally, it should be noted that Goldman Sachs and other major financial players are benefiting from a Federal Reserve program that allows them to borrow funds overnight for close to zero percent. Designed to catalyze economic activity and keep interest rates low for businesses and consumers, the program has also boosted bank profits by widening the spread between the cost of their incoming and outgoing capital.

Altogether, this government support essentially enabled Goldman to return to its traditional model of business: accepting risk in order to magnify profits. Specifically, Goldman boosted its “value-at-risk”—the estimated value of its trading activities on a given day under a worst-case scenario—to $245 million this past quarter from $182 million in the same quarter last year.

Shrewd business decisions by Goldman traders (along with a reduced field of competitors) were undoubtedly responsible for a good share of the profits being crowed about by the firm this week. Notably, the firm cashed in on profit margins for commodity and foreign exchange trading that, according to the Financial Times, now stand ”between two and eight times higher than before the height of the financial crisis.”

Indeed, the profits announced this week by Goldman Sachs are an encouraging sign that the financial markets are starting to return to normal. But they are by no means evidence of a full-fledged economic recovery. In fact, without the support of the aforementioned government programs, Goldman’s profits would have been incalculably lower.

In what some on Wall Street are calling the biggest blockbuster deal in the history of the financial sector, Goldman Sachs confirmed today that it was in talks to acquire the U.S. Department of the Treasury. According to Goldman spokesperson Jonathan Hestron, the merger between Goldman and the Treasury Department is "a good fit" because "they're in the business of printing money and so are we."

The Goldman spokesman said that the merger would create efficiencies for both entities: "We already have so many employees and so much money flowing back and forth, this would just streamline things." Mr. Hestron said the only challenge facing Goldman in completing the merger "is trying to figure out which parts of the Treasury Dept. we don't already own."

Goldman recently celebrated record earnings by roasting a suckling pig over a bonfire of hundred-dollar bills. Elsewhere, conspiracy theorists celebrated the 40th anniversary of NASA faking the moon landing. And in South Carolina, Gov. Mark Sanford gave his wife a new diamond ring, while his wife gave him an electronic ankle bracelet.

Goldman Sachs Group Inc. announced record earnings Tuesday of $3.44 billion for the second quarter of 2009. Goldman's stock price leapt 77 percent for the first half of 2009, and closed Tuesday at $149.66 a share. Without an ongoing series of front- and backdoor bailouts financed by U.S. taxpayers, most of Goldman's record profits would not have been possible.

In April 2009, Goldman Sachs' CEO, Lloyd Blankfein, who received record salary and bonus compensation of $68.5 million in 2007, said that bonus decisions made before the credit crisis looked "self-serving and greedy in hindsight." Now, they look self-serving and greedy with foresight. Goldman set aside $11.4 billion for employee compensation and benefits, up 33 percent from last year. That's enough to pay each employee more than $390,000, just for the first six months of this year.

In June, Goldman bought back its preferred shares, repaying $10 billion it received from the government's Troubled Asset Relief Program, or TARP, and setting it free of limits on executive compensation and dividends. But pay is not the key issue. U.S. taxpayers deserve a large cut of the profits, not the chump change -- less than a half-billion dollars -- they got from preferred shares in the company and the relatively small amount they could get from warrants in its stock.

U.S. taxpayers should insist that a large part of Goldman's revenues and profits belong to the American public. TARP money was just part of a series of bailouts and concessions that allowed Goldman to prosper at the expense of a flawed regulatory system. In March 2008, Goldman, a primary dealer in Treasury securities, was among the beneficiaries of a massive backdoor bailout by the Federal Reserve Bank. At the time, Henry Paulson, former CEO of Goldman Sachs, was treasury secretary.

In an unprecedented move, the Fed created a Term Securities Lending Facility, or TSLF, that allowed primary dealers like Goldman to give non-government-guaranteed "triple-A" rated assets to the Fed in exchange for loans. The trouble was that everyone knew the triple-A assets were not the safe securities they were advertised to be. Many were backed by mortgage loans that were failing at super speed. The bailout of American International Group, or AIG, ballooned from $85 billion in September 2008 to $182.5 billion. Of that money, $90 billion was funneled as collateral payments to banks that traded with AIG. American taxpayers may never see a dime of their bailout money again, but Goldman saw plenty.

Goldman may be the largest indirect beneficiary of AIG's bailout, receiving $12.9 billion in collateral, including securities lending transactions, from AIG after the government bailed out the insurance company. Goldman Sachs was granted bank holding company status in the fall of 2008. It already had the temporary ability to borrow from the Fed through the TSLF, which would have expired in January 2009. Now it has permanent access to lending from the Fed.

Goldman can now compete with the largest U.S. banks and borrow money at interest rates pushed as close to zero as possible by the Fed. Goldman gets a further benefit: favorable accounting rule changes. In addition, Goldman issued $30 billion of debt with a valuable government guarantee that remains outstanding. Meanwhile, the American public faces a rising unemployment rate, falling housing prices, rising unemployment, higher local taxes and a dismal economic outlook. Interested men with reputations and fortunes at stake rode roughshod over public interest. The American public is owed part of the profits Goldman was able to make because of the largesse of our Congress.

So, we read now that Goldman Sachs is back to making record profits ($2.7 billion in the last quarter alone) by taking higher risks (AP reports that Goldman has returned to "high-risk trading"). Great, the economy must be fixed. Or maybe it's the exact opposite -- it's a company taking advantage of a system they know is broken. Here is what I mean. Goldman Sachs knows that they are too big too fail. And they already know what the government does when a financial company is too big to fail. They bail them out -- no matter what.

What if Goldman took too many risks in making the absurd amount of money they're making now (while we're told that the banks don't have any money to lend)? What if they crashed right now? What do you think would happen?Everyone in the world knows that we would bail them out. The idea that Tim Geithner would let Goldman go under is so laughable that it makes me sick. Does anyone trust that guy's impartiality (other than Obama)? Does anyone believe there is even a 1% chance that Geithner and Summers would let Goldman go down?

So, if you knew that no matter what level risk you took the government would always come riding to the rescue -- and that more risk equals more money in the short term -- wouldn't you take more risk? Of course you would. Now, that might be short term thinking and you might get yourself into a lot of trouble in the long term. Well, if you were worried about what might happen in the long term, what would you do next? Right, take out as much money from the company as you possibly could and put it into your own pocket. And guess what Goldman is doing right now? They are setting aside $18 billion to pay their employees this year.

That's called looting the store. They're taking most of the money the company made and giving it to themselves. Who cares about the long term health of the company? The employees don't own it anymore. If they can take most of the money for themselves before it gets to the shareholders and do long term damage to the company, why not do it? What do they have to lose? It's not their company, but the check they take home is their money to keep. William K. Black wrote an excellent book called "Best Way to Rob a Bank is to Own One." That about sums it up. But these days the bank robbers have one additional advantage -- when the bank runs out of money, the government comes and fills it up again. Then, they invite them to rob it one more time.

So, who's convinced we have this financial problem under control? Who's convinced we have any idea what to do if Goldman went under? Who's convinced they have any incentive not to take more risk to make more money? Who's convinced that we have done enough to rein in banks that are too big to fail? No, we still have the same problem we did before. I disagreed with the bailouts. I think we gave the banks an enormous amount of money with almost no strings attached. I understood the urgency of bailing out the financial industry, but if we were going to do that, we could have at least made sure that we took steps to make sure this never, ever happened again. Now, who's convinced we've done that? No one, outside of a couple of suckers who are about to get their pocket picked again.

The US economic turnaround may not be complete. The AIG turnaround may not be complete. The GM turnaround may not be complete. But Goldman Sachs is back. "A Swift Return to Lofty Profits" proclaimed in the New York Times, as Goldman Sachs reported that it earned $3.44 billion in the second quarter, and is preparing its largest bonus payout in history. And without doubt, those lofty bonuses are well earned. Consider how effectively Goldman has navigated the roiling waters of the global financial crisis.

First, Goldman received a $10 billion injection of TARP funds to help it weather the market turmoil. Next, it swiftly converted itself into a commercial bank and member of the Federal Reserve system, gaining access to low or zero cost capital at the Fed Discount window and access to federally guaranteed borrowing through the FDIC Temporary Liquidity Guaranty Program. Finally, it garnered a $13 billion payout at one hundred cents on the dollar for its outstanding credit default swap contracts with AIG.

Now, we are told, Goldman's profitability stems from its trading prowess in global markets. Really? A $3.44 billion profit in the second quarter could be accounted for simply by a 25% run-up in the value of the CDS portfolio from its value when AIG stood as a bankrupt counterparty. No, Goldman may have trading prowess, but that pales against its political prowess.

Thirty years ago, most of the major Wall Street investment banks were partnerships, and those with the greatest prestige and market power--Salomon Brothers, Goldman Sachs, Lehman Brothers and Morgan Stanley--eschewed retail brokerage in favor of institutional relationships and proprietary trading. Only Merrill Lynch prided itself on retail brokerage and being a member of the New York Stock Exchange. Then, the world changed, as investment banking firms looked far and wide for new ways to strengthen their balance sheets and access new pools of capital.

One by one, the old-line partnerships fell by the wayside, casting aside their culture and independence for the lure of other people's money. Salomon merged first with Phibro, and then was subsumed into the emerging Citibank colossus. Lehman was acquired by American Express. Morgan Stanley suffered the ignominy of merging into the Sears Roebuck/Dean Witter/Discover financial services company. Only Goldman Sachs retained its culture and identity, even though it too tossed aside its partnership heritage in exchange for the lucre and capital offered through a public stock offering.

As one watches the evolution of Goldman, it is hard not to become a conspiracy theorist. After all, Goldman's rise from merely the top of the heap into the stratosphere has come after years of growing influence in Washington as one Goldman partner after another were appointed to senior positions in the Cabinet or White House--John Whitehead, Robert Rubin, Josh Bolten, Hank Paulson, to name a few--and tens of millions of dollars of political contributions found their way from Goldman Sachs into the campaign war chests of members of Congress, of Senators and Presidents, Democrats and Republicans alike.

Perhaps the public interest and the private interest just happened to coincide with the passage of the Financial Services Modernization Act in 1999 and the Commodity Futures Modernization Act of 2000. Perhaps the conversion of Goldman Sachs--a non-depositary institution--into a commercial bank, with access to Fed Funds and the Discount window, and eligible for FDIC guarantees on its debt offerings was in the public interest. And perhaps the public interest was somehow served when Goldman and others jumped to the front of the line of AIG creditors and were made whole on their credit default swap contracts with a bankrupt counterparty.

Perhaps. But we must conclude--because we believe in truth, justice and the American way--that Robert Rubin, Josh Bolten and Hank Paulson influenced and guided public policy in ways that was truly in the public interest, and that there was no nefarious connection between all of those campaign dollars and the direction of our national policy in any manner that unduly benefited Goldman Sachs over the years. Perhaps. But this year, appearances matter. And this is the year that has seen $10 billion of TARP money and $13 billion of AIG money and who knows what amount of additional Federal Reserve funds or federal guarantee benefits flow into the coffers of Goldman Sachs.

So perhaps, this year, Goldman Sachs employees should be content with the tripling in value of their stock--surely a direct result of all of the financial largesse that has flowed Goldman's way--and perhaps this is a year when $3.44 billion of Goldman Sachs profits should not turn into bonuses, without due consideration for how all of that was possible, and where that money came from. From the rest of us.

JPMorgan Chase & Co., the second- largest U.S. bank, said profit rose for the first time since 2007 on record investment-banking fees. Chief Executive Officer Jamie Dimon predicted more losses on consumer loans. Second-quarter earnings increased to $2.7 billion, or 28 cents a share, from $2 billion a year earlier, the New York- based bank said today in a statement. The average estimate of 14 analysts surveyed by Bloomberg was 5 cents a share, including costs to repay government bailout funds and an assessment by the Federal Deposit Insurance Corp.

Investment-banking revenue from trading and stock and bond underwriting is helping offset rising defaults on consumer loans, such as mortgages and credit cards. Dimon said he doesn’t expect the card business to make a profit this year or in 2010, and the company increased its loss projections for prime and subprime mortgages. "The credit problems, although they have stabilized, we’re still not out of the woods," said Gerard Cassidy, a banking analyst at RBC Capital Markets in Portland, Maine, in a Bloomberg Radio interview. "For JPMorgan Chase, the challenge going forward is going to continue to be deterioration of credit." JPMorgan fell 13 cents to $36.13 at 4 p.m. in New York Stock Exchange composite trading, paring its gain for the year to 15 percent.

The firm’s total net revenue was a record $27.7 billion on a managed basis, which compares with $19.7 billion in last year’s second-quarter. The return on common equity fell to 3 percent, which includes a charge for repaying government money. That figure would have been 6 percent excluding the charge to repay the Troubled Asset Relief Program, unchanged from the previous year’s period. JPMorgan’s retail bank posted income of $15 million as home-equity and prime mortgage defaults continued to rise. Home- equity charge-offs climbed to $1.3 billion, or 4.61 percent. Prime mortgage defaults were $481 million, or 3.07 percent, versus $104 million, or 1.08 percent a year earlier.

Credit cards lost $672 million, compared with income of $250 million in the second-quarter last year. The managed charge-off rate, which generally tracks unemployment, climbed to 10.03 percent, from 7.72 percent in the first quarter and 4.98 percent in the year-earlier period, according to the statement. JPMorgan said losses in its Chase credit-card portfolio may be 10 percent next quarter and will be "highly dependent" on unemployment after that. Losses for cards issued by Washington Mutual, which the bank acquired in September of 2008, may reach 24 percent by the end of the year, the company said.

The lender boosted its loan loss reserve to $2 billion in the quarter, adding to the $28 billion set aside to cover credit losses as of March 31. Tier 1 capital, a gauge of the bank’s ability to withstand losses, climbed to 9.7 percent from 9.3 percent in the first quarter. JPMorgan said prime mortgage losses may be $600 million "over the next several quarters," and subprime losses may be $500 million. Its guidance for home-equity loan losses remained the same at $1.4 billion.

Dimon, 53, said the firm supported "proper consumer protection" and that pending legislation setting up an agency to monitor consumer lending practices would hurt short-term profits in credit cards."There should be less regulatory agencies and not more" to avoid unnecessary bureaucracy, Dimon said on a call with analysts. The investment bank generated $1.47 billion of profit, almost quadruple the amount earned in last year’s second- quarter, as fees from underwriting stock and bond deals and fixed-income trading boosted results.

This was the first time since the beginning of the credit crisis in 2007 that JPMorgan didn’t take writedowns on its leveraged loans, Chief Financial Officer Michael Cavanagh said. The bank had "modestly positive" gains in the second quarter, net of hedges. JPMorgan now holds loans with a market value of $3.3 billion, down from $43 billion in September 2007, including loans acquired from failed investment bank Bear Stearns Cos.The bank ranks No. 1 in underwriting stocks globally and in managing bonds sold in the U.S., according to data compiled by Bloomberg.

Goldman Sachs Group Inc. said July 14 it made $3.44 billion in the quarter on record revenue from trading and underwriting stock. Revenue in the three months ended June 26 was $13.8 billion, up from $9.43 billion in the first quarter and $9.42 billion in the second quarter a year earlier. Profit at JPMorgan’s asset-management unit fell 11 percent to $352 million, while treasury and securities services posted income of $379 million, 11 percent less than the previous year. The commercial banking unit had income of $368 million, a 4 percent increase from last year’s quarter.

The bank is the largest to repay government cash under the Troubled Asset Relief Program, freeing it from compensation and other government restrictions. JPMorgan returned $25 billion in government funds last month, and paid more than $795 million to the U.S. in dividends, according to a June 17 statement. The TARP repayment accounted for 27 cents a share, or $1.1 billion, the bank said today.

JPMorgan paid the FDIC a special assessment of $675 million in the quarter, resulting in a cost of 10 cents a share, as the agency asks banks to help replenish its cash reserves. The fund fell to $13 billion in the first quarter, the lowest since September 1993, after 53 lenders failed far this year. Bank of America Corp., the biggest U.S. bank by assets, and No. 3 Citigroup Inc. are scheduled to release their latest results tomorrow. Wells Fargo & Co. and Morgan Stanley will announce earnings July 22.

JPMorgan Chase once again proved that it has been one of the better-run banks during the financial crisis after reporting quarterly results that blew past Wall Street estimates. Buoyed by a solid performance in the its investment banking division, the company said Thursday that profits in the second quarter rose 36% from a year ago to $2.7 billion, or 28 cents a share. That profit came despite a $1.1 billion one-time reduction to earnings tied to the company's decision to repay $25 billion in government money received under the Troubled Asset Relief Program.

JPMorgan Chase chairman and chief executive officer Jamie Dimon said he was "pleased" by the results, even as the company's latest numbers were weighed down by higher credit costs, particularly in the company's consumer lending and credit card businesses. Few analysts were expecting the quarter to turn out so well for the firm. Consensus estimates were for the company to book a profit of $280 million, or just 4 cents a share.

Some bearish analysts even suspected that the firm might swing to a loss in the quarter, given its significant exposure to the American consumer. Thursday's results, however, will certainly add to the ongoing debate on Wall Street as to whether the worst is indeed over for the nation's banks and if a recovery is already well underway. On Tuesday, Goldman Sachs delivered blowout second-quarter results, reporting a profit of $3.44 billion that handily beat analysts' estimates. JPMorgan Chase shares gained modestly in pre-market trading Thursday.

The US Federal Reserve believes that the recession will end "before long", but predicts that unemployment will remain at high levels for several years to come. The federal open market committee raised its forecasts for unemployment, according to minutes from their last meeting three weeks ago, and now expects it to reach between 9.8 and 10.1 per cent in the last quarter of this year. It envisages it will remain at about 9.6 per cent next year and 8.6 per cent in 2011.

"Labour market conditions were of particular concern to meeting participants," the minutes said, adding that "most participants anticipated that the employment situation was likely to be downbeat for some time". But the prospects for the wider economy were brightening, they said. The committee’s members agreed that "the economic contraction was slowing" and predicted that gross domestic product would drop by between 1.5 per cent and 1 per cent this year, more optimistic than their last forecast in April of a 2 to 1.3 per cent contraction.

For next year, they raised growth forecasts to between 2.1 per cent and 3.3 per cent, from a 2 to 3 per cent range. They increased projections for inflation, but they all expect it to remain below 2 per cent through this year and the next. "The unemployment forecasts ... are an interesting signal from the Fed’s point of view," said John Silvia, chief US economist at Wells Fargo. "[It sees] the economy picking up and having a recovery, but with persistent unemployment. It’s not a jobless recovery, but it sure is below average job growth in this sort of environment."

Most committee members saw the economy as "still quite weak and vulnerable to further adverse shocks". Because of the prospects for "weak economic activity, substantial resource slack and subdued inflation", it decided to keep interest "exceptionally low" for an extended period. Investors were unmoved by the release of the minutes. Stocks clung near their highs of the session and US Treasury bonds edged slightly lower. The dollar, which had taken a hammering early on, reached a low for the day as the upgrade in domestic product numbers encouraged investors to put money into riskier assets.

The Fed resolved to make no changes to its $300bn Treasury purchase plan, in part because prospects for the economy seemed to be improving. Although an expansion of such purchases might provide additional support, the effects of further asset purchases, especially purchases of Treasury securities, on the economy and on inflation expectations were uncertain, the minutes said. Many worry whether the Fed has an "exit strategy" to unwind its aggressive easing strategy and reduce its bloated balance sheet. The meeting "generally agreed that the Federal Reserve either had already or could develop tools to remove policy accommodation when appropriate."

The future shape of the credit derivatives market was already difficult to sketch out. With regulators and market participants immersed in a tussle over how much of it needs to be centrally cleared in order to reduce risks to the financial system, much debate has ensued about what form this market will take. Now, a new set of questions is making the rounds as the US Department of Justice investigates the $26,000bn credit derivatives market’s main data provider, Markit, and the dealers that control it for potential anticompetitive behaviour.

"It is opening another can of worms," said Joel Telpner, partner at Mayer Brown. "Many of the initiatives so far, such as the move towards centralised clearing, would not change anything in terms of how contracts are priced." He said it was unclear where the DoJ’s probe would lead – and whether it would change the structure of the market, which is dominated by a handful of large Wall Street firms – but it could have a significant impact. While the DoJ’s antitrust division has traditionally kept a close eye on financial markets, it has taken few enforcement actions in the last eight years when the Bush administration took a more hands-off attitude to competition.

The probe into the unregulated CDS market shows a new aggressiveness at the DoJ when it comes to antitrust – or anticompetitive – matters. Under the Sherman Act, which prohibits abuses of monopoly power, it has requested huge amounts of pricing and trading activity information going back several years. "This is a sea-change from the past eight years,’’ said Harvey Goldschmid, a law professor at Columbia University and a former commissioner at the Securities and Exchange Commission.

"The present antitrust division leadership is very different and far more concerned about traditional antitrust values than the group that led the division during the last eight years. This is a group that takes antitrust seriously and the need for competitive markets seriously.’’ Christine Varney, newly appointed assistant attorney-general in charge of antitrust policy, has indicated a desire to return to an active interpretation of the 1890 Sherman Act. Credit derivatives in the past decade became one of Wall Street’s most profitable segments, with a small group of banks such as JP Morgan Chase, Goldman Sachs, Citigroup and Morgan Stanley involved.

"Lack of transparency can lead to the appearance of smoke and, in the current political climate, a hint of smoke leads to the assumption of fire," said Tim Backshall, chief strategist at Credit Derivatives Research. Banks that have received DoJ requests are trying to assess just how much information they need to collect. It is likely to be an arduous task. Richard Epstein, law professor at the University of Chicago, said: "This is a big investigation which necessarily gives DoJ officials lots of discretion."

The Justice Department said it’s conducting an antitrust probe of the $28 trillion credit-default swap market that may determine if banks were anticompetitive in their use of clearinghouses to back trades."The antitrust division is investigating the possibility of anticompetitive practices in the credit derivatives clearing, trading and information services industries," Laura Sweeney, a Justice Department spokeswoman in Washington, said in an e-mail yesterday. She declined to elaborate.

The division sent civil investigative notices this month to banks that own London-based Markit Group Ltd. to find out if they have unfair access to price information, according to three people familiar with the matter. Congress plans to increase regulation of the $592 trillion over-the-counter derivatives market, which includes credit-default swaps blamed for helping worsen the biggest financial calamity since the Great Depression. Markit provides derivative and bond data to more than 1,500 customers. It owns the most actively-traded credit swap indexes and pricing services in the market, which represents $28 trillion in underlying securities, according to the New York- based Depository Trust & Clearing Corp. Clearinghouses, capitalized by members, insure both sides against default by the other.

Intercontinental Exchange Inc.’s ICE Trust clearinghouse is the only credit swap trade guarantor, having backed more than $1.3 trillion of the contracts since March. ICE Trust is supported by Wall Street’s largest banks, which will split profit from the venture beginning next year. CME Group Inc.’s CMDX clearing system, in partnership with Chicago-based hedge fund Citadel Investment Group LLC, hasn’t processed any trades. The Justice Department might "be exploring big banks’ failure to deal with competing clearinghouse ventures like the CME’s," said Craig Pirrong, a finance professor at the University of Houston. Kelly Loeffler, a spokeswoman for Atlanta-based Intercontinental, and Mary Haffenberg, a spokeswoman for Chicago’s CME Group, declined to comment.

New York-based JPMorgan Chase & Co. is Markit’s largest shareholder, followed by Bank of America Corp. of Charlotte, North Carolina, Edinburgh-based Royal Bank of Scotland Group Plc and New York-based Goldman Sachs Group Inc., according to filings at U.K. Companies House. All four, as well as Morgan Stanley of New York, Frankfurt-based Deutsche Bank AG, Zurich- based UBS AG and others, are members of ICE Trust that will receive profits beginning 2010. Bloomberg LP, the owner of Bloomberg News, competes with Markit in selling information to the financial-services industry.

Credit-default swaps -- contracts that protect against or speculate on defaults by paying the buyer the face value of a bond or loan if a borrower fails to meet its debt agreements -- ballooned almost 100-fold within seven years to represent about $62 trillion by the end of 2007, according to estimates from the New York-based International Swaps & Derivatives Association. Unregulated trading of the contracts made it difficult for the U.S. to assess links between institutions following the collapse of Lehman Brothers Holdings Inc. in September. Credit markets froze when the New York-based firm, once the fourth- largest U.S. investment bank, filed for the world’s biggest bankruptcy.

The U.S. Federal Reserve determined that ICE Trust is as risky as any insured bank, according to a letter posted July 14 on the regulator’s Web site. The Fed is requiring that bank members of ICE Trust, such as Goldman Sachs and New York-based Citigroup Inc., set aside the same amount of capital as parties trading as federally-backed lenders. The Obama administration wants all trades of over-the- counter derivatives to be backed by clearinghouses or registered with regulators. Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather.

Citigroup is close to a secret agreement with one of its main regulators that will increase scrutiny of the US bank and force it to fix financial, managerial and governance issues. People close to the situation said that the deal had been discussed in recent weeks amid increased pressure on Citi from the Federal Deposit Insurance Corporation, the regulator, and could be finalised soon. The proposed agreement requires, among other things, that Citi strengthens its board and governance, improves asset quality, better manages expenses and provides more information to regulators on its capital and liquidity, these people added.

The regulator’s action highlights concern over Citi’s financial health, governance and the strength of its management team, led by Vikram Pandit, chief executive. The FDIC is known to be frustrated with the slow pace of Citi’s "toxic" assets sales, its losses and the lack of commercial banking experience at the top. An agreement would strengthen the FDIC’s position in its dealings with Citi and its demands for detailed financial information as it deliberates over whether to include it on its list of "problem banks".

Citi, which is about to cede a 34 per cent stake to the US government as part of its latest rescue, struck a similar agreement with another regulator late last year, industry executives say. The bank and its main regulators – the Office of the Comptroller of the Currency, the Federal Reserve and the FDIC – declined to comment. Agreements between regulators and a bank’s management and board – known as "informal actions" – are not made public to avoid stoking investors’ fears. They can be in a "memorandum of understanding" or a "commitment letter" from the bank to the authorities and are fairly unusual and less serious than formal enforcement actions. Some MOUs and commitment letters can restrict the company’s ability to operate in certain markets or products but it is unclear whether Citi’s latest agreement contains such provisions.

Citi, which is expected to report a second-quarter loss on Friday, is already addressing some of the regulators’ concerns. It has hired five new directors and is looking for three more, bolstered its balance sheet and recruited executives with commercial banking expertise. It has also pledged to sell billions of dollars in non-core businesses and assets. The proposed agreement with the FDIC focuses on Citi’s business and governance rather than its executives and was not a direct cause for last week’s switch of its finance chief Ned Kelly to another role, said people close to the situation.

A market is set to emerge this week in Californian IOUs as the persistence of the state’s budget crisis is making it increasingly difficult to exchange these emergency instruments for cash. California is printing $3bn of IOUs for businesses, individual taxpayers and local counties in lieu of cash. It has sent more than $450m of them to court-appointed attorneys, county-run health schemes and taxpayers awaiting rebates, among others.

IOUs will continue to be issued until Arnold Schwarzenegger, California governor, and the state legislature agree a deal to close a $26bn budget deficit. The state began issuing the IOUs early this month. SecondMarket, a New York firm that trades illiquid assets, launched a platform for trading the IOUs on Wednesday. A decision last week by large banks, such as Wells Fargo and Bank of America, to stop accepting the IOUs has paved the way for some initial trading, although volumes are expected to be very thin.

Citigroup, Bank of the West, credit unions and some community banks still are accepting the IOUs for their customers. "With several major banks no longer redeeming Californian IOUs, and with some citizens, businesses and municipalities needing liquidity, we felt it was important to launch this market promptly," said Barry Silbert, SecondMarket chief executive. Buyers and sellers can list their interest, and SecondMarket expects bids to emerge later in the week. It first needs to verify the listed IOUs with the state. Hedge funds and municipal bond investors are among the interested buyers.

Trading in the IOUs is controversial and drew the eye of regulators after offers from opportunistic individuals popped up on websites such as Craigslist. "The [California] Treasury is concerned about the potential for IOU holders in a vulnerable position being victimised by con artists," said a spokesman for the state treasurer. The Securities and Exchange Commission last week ruled the notes were tradeable securities, but only by banks or broker-dealers that comply with recommendations by the Municipal Securities Rulemaking Board. Individuals involved in more than single, one-off private transactions risk violating securities law. Assuming California can repay the IOUs as promised on or before October 2, their 3.75 per cent annual rate is attractive for a short-term obligation.

Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand, according to academic and former U.S. government adviser Philip Verleger. A crude surplus of 100 million barrels will accumulate by the end of the year, straining global storage capacity and sending prices to a seven-year low, said Verleger, who correctly predicted in 2007 that prices were set to exceed $100. Supply is outpacing demand by about 1 million barrels a day, he said.

"The economic situation is not getting better," Verleger, 64, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a telephone interview yesterday. "Global refinery runs are going to be much lower in the fall. If the recession continues and it’s a warm winter, it’s going to be devastating." Crude oil last traded at $20 a barrel in February 2002. Futures were at $61.18 today in New York, having recovered 89 percent from a four-year low reached last December. The Organization of Petroleum Exporting Countries is implementing record supply cuts announced last year in response to plunging consumption.

"OPEC don’t realize the magnitude of the cuts they need to make," which would total about a further 2 million barrels a day, Verleger added. "Storage is going to become tight. It’s not clear if there’s going to be enough storage available." Oil will average $63.91 in the fourth quarter, according to the median of analyst forecasts compiled by Bloomberg. Crude for December delivery traded at $65.61 today in New York. Prices have rebounded on expectations of a demand recovery, led by China and other developing economies, and concern expansionary monetary policy would stoke inflation and weaken the dollar.

At the other end of the spectrum from Verleger, Goldman Sachs Group Inc. predicted in a report yesterday oil will rally to $85 a barrel by the end of the year, and recommended that clients buy futures contracts for delivery in December 2011. "China is in a real desperate situation," said Verleger, who publishes the Petroleum Economics Monthly. "We’re in a situation where U.S. consumers aren’t consuming and Chinese manufacturers get hurt. Economists are looking for growth in all the wrong places."

Forward contracts for oil have been higher than prices for immediate delivery this year, a situation known as contango, creating incentives to buy crude now and store it. That may end as growing stockpiles make storage more expensive. "Prices would be much lower today, but for the very large incentive to build inventories," Verleger said. "You need forward buyers, which we had when people were fearing inflation, but as concerns turn toward deflation" that will no longer be the case.

Investors should brace themselves for explosive economic growth in the coming quarters as trade with the United States rebounds, Merrill Lynch said Tuesday. Economist Sheryl King said the latest Bank of Canada report suggests the economy could bounce back with several quarters of 10 per cent growth in the next year. Her report is titled: "Are markets ready for 10 per cent GDP?" The answer to her question is a solid "no."

"Fixed income and equity markets alike are overly focused on yesterday's news," she said. "But we've seen a huge surge in business sentiment, which is a much more timely piece of information even though it is anecdotal."She said the Bank's Business Outlook survey turned sharply in the second quarter, with a reading of 39 compared to -22 in the first quarter and "an epic" -34 in the fourth quarter. "The markets are far too fixated on the slow, halting, return to growth scenario, in our opinion – especially since recoveries virtually never have that nice linear trajectory," she said.

She said the survey's correlation with real GDP growth is "quite strong" at 60 per cent and implies year-on-year GDP growth in the 4.25 per cent range. To reach that number, she said "a burst of growth" would be needed in the fourth quarter or first quarter of 2010. While investors have been disappointed in several economic reports recently that haven't validated the 42 per cent run in stocks from March lows, she said the bank's report "was taken between late May and mid-June and thus is more up-to-date on the state of the economy than most of the recent data flow.

"The survey has an even stronger correlation with economic activity stateside than for Canada," she said. "If true, businesses may be getting a sense of better cross border order-flow that we have not yet seen in any hard data release, and we may see a better tone in those trade figures in the next couple of quarters. Certainly, the unusual jump in Canada railcar shipments in June and into July corroborates this possibility." The bounce, she warned, could be short-term. She has recently expressed concern that Canada's central bank will snuff any recovery by withdrawing stimulus measures too soon.

"I'd say it's almost guaranteed if we see pop in growth that we won't see a sustained pop," she said, as she recommended investors turn to cyclical stocks to benefit from the growth. "Investors may want to think about dipping their toes into cyclicals, although they are trades you maybe want to rent rather than own since I'm not sure we'll see sustained growth. While she raised the possibility of sharper-than-expected growth, she didn't go so far as to change her outlook for the year. Her 3.8 per cent target puts her at the top end of the range of expectations – The Conference Board of Canada expects a contraction of 1.9 per cent while the International Monetary Fund has predicted Canada's GDP will shrink 2.3 per cent this year.

Douglas Porter, a senior economist at BMO Nesbitt Burns Inc., said it would be possible for a quarter or two of rapid growth "if everything went absolutely perfect in terms of stimulus spending and recovery," but cautioned the global economy is still on very shaky ground. "Things were so very depressed that I wouldn't be surprised if we saw a temporary bounce," he said. "But the bigger question is whether that growth can remain robust for more than a quarter."

A double-digit recovery wouldn't be without precedent, Mr. Porter said. Singapore's economy staged an unexpected recovery in the second quarter, with government data showing the economy grew at an annualized 20.4 per cent from April through June compared to the previous three months after double digit declines in previous quarters. "I do think we're going to start seeing things like this happening around the world in the coming quarters," Mr. Porter said. "But there are still very severe headwinds for the global economy."

Meanwhile, second-quarter growth figures from China to be released by Beijing on Thursday are expected to show the economy expanded 7.5 per cent in the second quarter. "The Singapore economy is back and back with a vengeance," Robert Prior-Wandesforde, senior Asia economist for HSBC in Singapore, told the Associated Press. "We very much doubt that today's Singapore GDP release will be the last in Asia to provide a sizable upside surprise."

If the government of the UK wishes to find a suitable motto, it should adopt the advice of a great Scot. "Great Britain should," wrote Adam Smith in The Wealth of Nations, "...endeavour to accommodate her future views and designs to the real mediocrity of her circumstances." Smith offers wise counsel. The country’s circumstances are more mediocre than imagined two years ago. The question is how to respond.

Three things have combined to postpone widespread recognition of the task: first, the government that was in charge when exaggerated optimism became rife is still in power; second, nobody can be sure how mediocre the country’s longer-term circumstances are going to be; and, finally, as Giles Wilkes points out in an excellent new paper for the Liberal Democrat think tank, CentreForum, with modest initial levels of public debt and low nominal and real interest rates, the UK government was right to let its borrowing take the strain.* The result has been a "phoney war". Hysteria over a few million pounds in expenses for members of parliament has drowned out discussion of close to £200bn ($330bn, €230bn) in annual government borrowing. But the phoney war will end. How should the UK plan to fight the real one?

It must start by making finance safer. The simple and painful truth is that another such financial shock might even bankrupt the British state. No industry can be allowed to impose such costs – comparable, in fiscal terms, to those of a major war – on a largely innocent public. Unfortunately, while containing sensible points, the Treasury’s white paper on financial markets is imbued with what I think of as an industrial policy perspective on finance. It accepts, not least, that it should be a goal of policy to "maintain the future pre-eminence of the UK’s international financial services markets". Alas, a competitive advantage in the supply of global "bads" is really a disadvantage.

Private parties cannot be allowed to gamble with taxpayers’ money. Letting that happen is to provide a gigantic subsidy. The right policy is to ensure that the costs imposed by the failings of finance on the rest of society are properly internalised within the sector. Then, let the market forces we are supposed to believe in decide how big the sector should be. This is why a crucial reform is a credible plan to wind up institutions when they manage to get into difficulty. It is also why higher capital requirements are needed. Government must also deal with the fiscal legacy of the present crisis. As an immortal borrower with an excellent credit rating it was right to become borrower of last resort in the crisis. The big question is how and when to unwind these deficits.

Nobody can doubt that a huge effort at fiscal consolidation will be needed once the economy recovers. The question is how long such consolidation can be postponed if the economy does not. The danger of acting too soon is that it would deepen the recession. The danger of acting too late is that the debt accumulation might generate a vicious spiral of rising real interest rates and so explosive debt-dynamics. My guess is that it will be impossible to postpone tightening for very many years, even if the recovery is not as strong as one might wish. But the more credible the commitment to stability, the longer it can be postponed. That can be achieved by cementing the credibility of the independent central bank and by spelling out the details and scale of the spending cuts and tax boosts that will follow recovery.

In his paper, Mr Wilkes focuses on raising taxes on property and the value added tax. The arguments for imposing heavy taxes on site values are very strong. We have just seen, in all too glorious colour, the dire results of turning a nation’s population into land speculators. If necessary, let the cash-poor but land-rich borrow their tax payments from the government, and demand repayment on death.

VAT revenues must also be raised, which can be done by eliminating exemptions. Equally important, however, will be a plan for curbing spending that does minimal damage to the country’s future. Public sector wages and pensions will have to be curbed. The former can be achieved by curbing the aggregate wage bill and letting managers decide the details. This should also drive higher public sector productivity. Beyond that, governments must protect true investment. But neither health nor education can be sacrosanct.

What matters is not the overall value of such specific areas of spending, but their benefits at the margin. The UK will never have a better chance than now to rethink public sector priorities and long-term funding. It is painful to be forced to parcel out the consequences of unforeseen losses. But these losses look permanent and so cannot be avoided. Fortunately, such crises are not all bad. They are opportunities for desirable change. In the case of the UK, change is inescapable. The party that deserves to govern is the one that recognises the pain and embraces the opportunities.

Unemployment in Britain is at the highest level since Labour came to power, official figures showed yesterday, and economists warned worse is yet to come. The number of jobless rose to 2.38m in the three months to the end of May according to the Office for National Statistics (ONS), the worst figure since 1995. It followed a record quarterly increase of 281,000 compared with the three months to February. The dismal figures drove the unemployment rate up to 7.6pc from 7.2pc - a 12-year high - and surprised economists who had predicted the rate would increase to 7.4pc. The number of unemployed people is expected to peak at around 3m during the first half of 2010.

John Philpott, chief economist at the Chartered Institute of Personnel and Development described the data as "wretched." He added: "Any optimism that unemployment will peak below 3m next year before the jobs outlook starts to improve would appear to have evaporated." The British Chambers of Commerce reiterated its forecast that unemployment will peak at 3.2m. However, the trend was not reflected in the ONS claimant count figures, which showed the number of people claiming unemployment benefit rose by 23,800 in June to, a far smaller increase than the 41,300 predicted and the smallest in more than a year.

Economists said the two different measures of unemployment sent "mixed messages" about the labour market in the UK. Philip Shaw, economist at Investec, said the slowing growth in those claiming jobless benefits could be explained partly by individuals who move onto government schemes such as the New Deal. He said it was becoming an "increasingly unreliable indicator of trends in unemployment", adding that he would focus on the broader measure from now on.

Dr Philpott called for an immediate joint investigation by the Department for Work and Pensions and the ONS into why the claimant count figures painted a much rosier picture of British unemployment. He said the findings should be published by the early autumn. Separately ONS figures showed wage growth in the UK rose to 2.3pc in the year to May, based on a three month average, up from 0.9pc in April. This reflected a less significant month for City bonus payments, which had been declining sharply. Excluding bonuses, pay growth slowed to 2.6pc, from 2.7pc.

There is hope that companies who choose to impose wage freezes and cut working hours to limit job losses will have a positive effect on the labour market. "Although employment will likely continue to fall for several months to come, the analysis we are working on at the moment suggests that these signs of flexibility in the labour market will help to limit the pace of overall job losses, and shorten the period of labour market adjustment relative to prior recessions," said Allan Monks, at JP Morgan.

Prime Minister Gordon Brown risks putting pressure on the pound unless he produces a "credible plan" to curb Britain’s budget deficit, the International Monetary Fund said. "The success of the current policy package hinges on the trust of the public in the solvency of the government," the IMF said today in Washington in an annual assessment. "Authorities need to commit to a credible plan to reverse the deterioration of the fiscal position in the medium term and build a broad public consensus around a concrete consolidation plan."

The fund predicts U.K. debt may double to almost 100 percent of gross domestic product in the next five years, a level that Standard & Poor’s said in May was incompatible with Britain’s top AAA credit rating. Brown, who faces an election within the next year, has resisted talking about spending cuts, saying the economy needs a boost from government funds. "Should fiscal sustainability come into question, interest rates would rise despite monetary easing efforts, the ability of the government to provide support to the financial sector would be severely limited, and pressures on the currency could emerge," the fund said.

Fiscal consolidation should start when the economic recovery has taken hold, Ajai Chopra, the IMF’s mission chief for the U.K., told journalists on a conference call today. "Right now it would be premature to be start tightening," Chopra said. "It doesn’t mean its not too early to start thinking about the nature of the adjustment. This will be part of the political debate in the U.K. over the next year." Currently, the U.K.’s budget deficit is on track to reach 12.7 percent of GDP this year and 13 percent in 2010, the IMF predicted.

The IMF’s report said some of its directors agree that Brown’s government should stand ready to provide further capital to the banking system. "Substantial further writedowns would result in an erosion of capital buffers and might lead to renewed doubts about the capital adequacy of individual financial institutions," the report said. "These lingering uncertainties are restraining lending growth." Banks worldwide have posted almost $1.5 trillion of credit losses since the financial crisis began in 2007. The Bank of England cut the key interest rate to a record low of 0.5 percent and is buying 125 billion pounds ($205 billion) of assets with newly created money to ease lending strains in the economy.

The IMF said it was "too early" to judge the effects of the bank’s plan to kick-start growth by printing money. Capital markets may be improved were the bank to broaden the range of assets it buys from the current plan to purchase gilts, corporate bonds and commercial paper, the group said. The bank may purchase asset-backed commercial paper and should consider buying other asset-backed securities, fund officials said. The British authorities’ actions "have helped avert a systemic breakdown in the financial system, although vulnerabilities remain," the report said. "The economic outlook is highly uncertain."

Banks and building societies are under fresh pressure to cut their mortgage rates after the rate at which they lend to each other fell to the lowest level for more than 20 years. The rate, known as Libor, fell below one per cent for the first time since it was set up in 1986. This means that banks, in theory, have never been able to borrow money so cheaply. However, home buyers have failed to benefit, with the average two-year tracker rate mortgage for new customers climbing from 3.73 per cent a month ago to 3.77 per cent yesterday, according to the financial publisher Moneyfacts.

Mortgage experts said lenders were being "unfair" to home owners and their stubborn refusal to cut rates was threatening a recovery in the housing market and the wider economy. Some of the worst offenders are the nationalised and part-nationalised banks — Halifax, Lloyds Banking Group and Northern Rock. None of them offers a tracker rate mortgage below 3.25 per cent, despite being given billions by the taxpayer to rescue them from collapse. Earlier this week, banks were accused of "ripping off" consumers after it was disclosed that they were pushing up the price of fixed-rate mortgages to their highest level — relative to the Bank of England rate — for at least 20 years.

Vince Cable, the Liberal Democrat Treasury spokesman, said: "I just do not accept that it makes any sense for the nationalised and semi-nationalised banks to be building up capital reserves. There is no risk they will fail because they are owned by the taxpayer. Their primary requirement is to support the economy through lending." Mick McAteer, a former head of policy at Which? and now the head of the Financial Inclusion Centre think tank, said: "Banks have been using the cuts in the Bank of England rate to increase their revenues by billions. "There is a basic lack of competition and they have a stranglehold. People are paying more than they should for credit cards and overdrafts as well."

When banks borrow money to fund their variable rate mortgages, such as tracker-rate deals, they go to the wholesale money markets. Here, the cost of money is set by a rate known as three-month Libor. This rate has fallen steadily in recent months as City investors become increasingly convinced that deflation will remain for some time and the Bank of England will keep its Bank Rate at 0.5 per cent into next year. In March, three-month Libor was above two per cent. Yesterday it fell from 1.01 to 0.99 per cent. With mortgage rates increasing and banks’ borrowing costs falling, lenders are able to increase their profits.

Four million home owners have tracker mortgages that rise and fall with the Bank of England base rate, currently at its lowest level. However, banks have gradually raised the starting rate for trackers by withdrawing their most competitive deals. Jonathan Cornell, a mortgage broker at First Action Finance, said: "Bank borrowing costs falling below one per cent should be great news for borrowers, but what we are seeing is tracker rates creeping up and up. It is rather unfair on home owners and symptomatic of the fact banks can behave as they want to because of the complete lack of competition." The Council of Mortgage Lenders argued that the cost of borrowing was a "complex jigsaw" and not solely set by Libor. "It is misleading to assume that higher fixed rates simply reflect a desire to increase profitability," a spokesman said.

Latvia said Wednesday that the International Monetary Fund had imposed fresh conditions for it to qualify for rescue funds, exacerbating an emerging split with the European Union over a €7.5 billion bailout last year. Latvia’s rescue program has run into trouble repeatedly since it was agreed upon last autumn. Since then, there have been riots in Riga, the capital, and a change of government. Assistance funds have been disbursed late or not at all.

Analysts said other countries that have gotten help from the I.M.F., like Hungary and Ukraine, could also be affected by uncertainty over Latvia, raising the prospect of renewed financial turbulence in emerging markets. The stakes are particularly high because Latvia has pegged its currency to the euro, the common European currency, and is loath to give it up. Teams from both the I.M.F. and the E.U. are in Riga again this week, and the prime minister, Valdis Dombrovskis, said the negotiations had turned contentious, largely over how quickly to cut the country’s budget deficit. "The talks are fairly difficult," he told Latvian radio. "The conditions the I.M.F. is proposing are also fairly difficult."

A devaluation would hit banks from other E.U. countries that are heavily invested in Latvia, particularly Sweden, especially hard. It also could highlight the dwindling credibility of plans across the region for countries in Eastern Europe to eventually adopt the euro. An outright Latvian default, however, seems unlikely, analysts said. "A default of a sovereign government in the European Union is simply not going to be contemplated, politically speaking," said Daniel Gros, director of the Center for European Policy Studies in Brussels. "No one considers that acceptable."

Christian Keller, chief economist for emerging Europe at Barclays Capital in London, said that a more orderly devaluation might be possible. The fund has long been skeptical that Latvia could restructure its economy at a time of crisis without devaluing its currency, but swallowed its reservations for the sake of a quick solution last year, according to two former I.M.F. officials, who spoke on condition of anonymity because they were no longer with the fund. Now that the crisis has eased, the I.M.F. seems to be more willing to make tougher demands that could lead to a devaluation. But to publicly call for such a move would roil markets.

The E.U., by contrast, has focused on supporting one of its members. Both the I.M.F. and the E.U. declined to comment on the continuing talks. A currency devaluation would be a standard prescription to ease Latvia’s pain, as it would promote exports and ease pressure to cut wages at a time when domestic demand is collapsing at a harrowing pace. Latvian officials have countered that heavy euro-denominated debts among households and companies would make a devaluation suicide. It also would put off the day Latvia could adopt the euro. But critics point out that the current policy of budget and wage cuts is no cakewalk either.

Latvia is trying to rebalance an economy that shrank by 18 percent in the first quarter of this year by cutting government spending and wages, a process known as an "internal devaluation." It wants to reduce a budget deficit, which could hit 10 percent of gross domestic product this year, to 3 percent by 2012, a vital threshold for euro membership. But that has proved political dynamite in Latvia. The E.U. delayed disbursement of a €1.2 billion, or $1.7 billion, portion of the rescue fund, which it eventually provided, until the Latvian Parliament passed a package of budget cuts in June. The I.M.F. has not yet provided a $200 million loan that was due in March. The differences between the I.M.F. and the E.U. appear to boil down to an assessment of the political will in Latvia to reduce government spending, with the E.U. more sanguine than the fund.

The fund is also haunted by memories of Argentina, which had pegged its currency to the U.S. dollar with I.M.F. support before defaulting in 2001, while the E.U. is standing behind one of its smallest members. "It is so clear that Latvia’s peg is ultimately unsustainable, all protestations by Latvian government officials notwithstanding," said Kenneth Rogoff, a former chief economist at the I.M.F.. "But ultimately unsustainable pegs can go on for years before crashing and burning, and Brussels seems to be willing to pay a lot to get past the financial crisis before cutting the cord on Latvia."

New Zealand’s long-term sovereign credit rating outlook was cut to negative from stable by Fitch Ratings, which said it is concerned by the economic outlook and the size of the nation’s current account deficit. The deficit is large and projected to remain above the level necessary to stabilize and reduce net debt, Ai Ling Ngiam, a Fitch sovereign analyst in Singapore said in a statement. New Zealand’s dollar fell after the report.

Finance Minister Bill English said yesterday the economy faces a "bumpy" road as it recovers from the worst recession in three decades. In May, he deferred income-tax cuts and trimmed spending to contain a budget blowout, prompting Standard & Poor’s to revise its credit rating outlook to stable from negative. "A stronger fiscal adjustment than currently planned may be required to raise national savings and reduce the current account deficit, as well as structural reforms to improve productivity," Fitch said in today’s statement.

New Zealand’s dollar fell to 64.00 U.S. cents at 4:55 p.m. in Wellington from 64.57 cents immediately before the statement was released. New Zealand’s current account deficit was 8.5 percent of gross domestic product in the year ended March 31. The U.S. shortfall was 4.5 percent of GDP in the same period. In May, the government forecast the first budget cash deficit in nine years and said the gap might widen to 6.9 percent of GDP by June 2011. "It’s a twin-deficit issue," said Craig Ebert, senior economist at Bank of New Zealand Ltd. in Wellington. "It was okay when we ran a current account deficit because we had fiscal surpluses. Now we’ve got both in deficit it’s more of a structural worry."

Prime Minister John Key yesterday said there has been insufficient investment in sectors of the economy that will boost exports and help narrow an "unsustainably large" current account deficit. Reserve Bank Governor Alan Bollard this week said the New Zealand dollar, which has surged 17 percent the past six months, needed to be weaker to bolster exports The currency "appears more responsive to global financial conditions than to domestic economic fundamentals," Fitch said today.

The ratings company said low interest rates and an "accommodative" fiscal stance means households may not reduce spending and borrowing enough to reduce the current account deficit and the nation’s external debt to a safe level. "Against this backdrop of external vulnerability, more aggressive restoration of public finances through fiscal prudence will be needed to raise the national savings rate to counter weak private savings." Fitch said.Fitch affirmed New Zealand’s foreign currency rating at AA+, its second-highest level. The local-currency rating was affirmed at AAA.

The recession is supposedly bottoming out, but where is the upswing? The crisis is hitting southern Germany particularly hard as engineering companies and auto parts manufacturers lose orders at a faster pace than ever before. Ironically, their strength as exporters is the cause of their current troubles.

Karl Schlecht is standing on the roof terrace of his company headquarters, looking down at his life's work. He moves carefully toward the railing. Schlecht is 77, his bones ache and his new hip is causing problems. But his ailments are minor when compared with the worries of Putzmeister, the company he founded 51 years ago in Aichtal, a town in Germany's southwestern Swabia region. "It makes my heart ache," says Schlecht, as he stares out at an area devoid of human activity.

There is no one to be seen on the factory grounds -- no metal workers, no mechanics, no engineers. Most of the employees have been on short time since January, and the concrete pumps and mortar machines the company produces are beginning to accumulate throughout the plant -- inventory for which there are no longer any buyers. In other words, dead capital. Only last year, Arab and Asian buyers were clamoring for Schlecht's products. Putzmeister had erected a separate building for making large pieces of equipment designed to convey concrete and mortar hundreds of meters into the sky on high-rise building construction sites in Dubai, Beijing and Shanghai. "It was like a beehive," says Schlecht, referring to the amount of activity in the new building. But nothing is humming on those sites anymore.

Order volume has declined by more than half, and Putzmeister is already losing €5-10 million ($7-14 million) a month. Management consultants have analyzed the company's operations and recommended sharp cutbacks. "Well," says Schlecht, "we'll have to cut the company in half." And this at a time when others are already hoping for a turnaround in the economy? Putzmeister, with its 3,600 employees, was until recently still being celebrated as one of those typical mid-sized, virtually unknown German companies that is a world leader in its niche market. Many of these companies are mechanical engineering companies and auto parts suppliers, produce first-class products, have exceptional expertise and export a large share of what they make. Putzmeister, for example, exports about 90 percent of its products.

The German economy is famous for such "hidden champions." These closet global market leaders have served as both an engine for growth and a job-creating machine for Germany. Their concentration is particularly high in southwestern Germany, in small cities and towns along a corridor stretching from Pforzheim to Stuttgart to Ulm. Their benchmark was the world, and now their world is falling apart. Orders have plunged by anywhere from 30 to 50 percent, in some cases even more. This, in turn, has created massive excess capacity. Temporary workers have long been let go, and fixed-term contracts have expired. Most of the remaining workers are now on state-supported short-time working schemes, where the government helps to make up their lost income.

A company that has lost half of its business needs to grow by about 10 percent a year for at least seven years to return to former levels. More realistically, management should consider itself lucky if there is any growth at all in the near future. The direct consequences include mass layoffs, plant closures and bankruptcies. Is there any glimmer of hope? "I don't think so," says Peter Zimmermann, the CEO of Mink, a company based in the town of Göppingen near Stuttgart. A family business in its sixth generation, Mink is the world market leader in specialized industrial brushes. Zimmermann is incensed when he hears people say that the worst is over. "This isn't a crisis," he says. "It's a catastrophe."

Zimmermann estimates that the company has been set back by a decade. Orders have declined by 40 percent, and he is now forced to reduce staff, letting people go he would like to have kept on. The priority, says Zimmermann, is to make sure the company survives, "as horrible as it sounds." Even the boldest of optimists are slowly realizing what a break with the past the global economic crisis represents for Germany, particularly for the southwestern state of Baden-Württemberg. More than in most other regions, the population here depends heavily on exports of its products: machinery, industrial equipment and automobiles. The region was one of the main beneficiaries of globalization, making its current plunge all the more precipitous.

This regional slump is relatively unaffected by the most recent figures from Berlin, which indicate that German industry experienced a rise in orders and exports in May. The general euphoria over such figures is difficult to comprehend, especially when one considers that the number of new orders, when compared with May of last year -- the key benchmark -- has declined by almost 30 percent, while exports are down about 25 percent. Perhaps the economy is indeed bottoming out, as it reaches what Frank Mattern, the head of management consulting firm McKinsey's German operations, refers to as the "new normal" of business activity. Nevertheless, old sales figures remain unattainable for now. Even if the crisis ends soon, Germany, as a manufacturing economy, will have changed after the crisis. The question is: What will it look like?

Companies will become more cautious, taking less risk and investing less, even though nothing is more important now than to develop the products of tomorrow. But companies lack the confidence to do that. This lack of confidence, in turn, has been most detrimental to the dynamics of the economy. "In the coming years," says McKinsey's Frank Mattern, "we will have to get used to lower growth rates." Nowhere has the impact of economic decline been as harsh as in the region that has come to be known as Germany's Musterländle (loosely translated as "model state"). "Things are getting grim here," says Putzmeister CEO Karl Schlecht.

An economic network with roots dating back to the early 19th century is beginning to crumble. Back then, young businesses located along the Ulm-Stuttgart railroad line, including press maker Schuler in Göppingen (founded 1839), exhaust specialist Eberspächer in Esslingen (1865), auto parts maker Bosch (1886) and carmaker Daimler (1890) in Stuttgart. Companies were founded then that still shape the region's industrial landscape today. They have survived two world wars and several monetary reforms, but now they face their toughest test yet. Sieghard Bender, the head of the local branch of the IG Metall metalworkers' union, considers 90 of the roughly 100 larger companies in his district to be problem cases. When asked how many of those companies are still doing relatively well, the union leader pauses to think for a moment. Five, he answers.

Bender, an easygoing man in his mid-50s, is sitting on a wooden bench in the garden behind the union's offices. The regional chapter is having a summer party, and Bender is getting himself a serving of pasta salad. He is one of the few people here who has already lived through a severe crisis. In 1991, then IG Metall Chairman Franz Steinkühler sent him to Chemnitz, a traditional location for engineering companies, to save what could be saved after the demise of East Germany. That experience helps him today, says Bender.

For months, he has been rushing from one employee meeting to the next. He senses the discontent brewing among workers, who face growing problems and expectations that are essentially unrealizable. On the bright side, he says, the regional chapter is gaining new members again, at a rate of about 50 a month. The summer party has given Bender an evening of respite, with the exception of the music booming from the building. The union officials have taken refuge in the garden, where they are discussing the depressing nature of short-time work.

"The people are suffering, the way a dog suffers when it has nothing to do," says Bender, slapping a colleague on the back. The man, Roland Weber, is 38 and can easily spend a quarter of an hour giving an impromptu lecture on how a piece of metal achieves the desired strength through a process of heating and cooling. This is his field, and he clearly knows it inside and out. Weber, a metal hardener by trade, has worked for Index, an Esslingen company that manufactures machine tools, for the past 15 years. He was working six days a week until last fall, but now he works only three days a month. Short-time work has turned his life upside down.

Nowadays, Weber handles many of the household responsibilities, driving his children to sports practice or shopping for groceries. He runs into other Index employees at the supermarket, where he sometimes has a cup of coffee with them. Weber has quit smoking, saving €200 ($280) a month as a result. The family has been forced to cut corners, no longer going out to steakhouses in Stuttgart and canceling its beach vacation in Italy. Nevertheless, Weber estimates that they are still short by about €600 ($840) a month. "There's too much month left at the end of the money," he says. Weber prefers not to think about how much longer the short-time work will last, what happens after the company's annual summer shutdown, and whether his profession as a metal hardener has a future. "If I did, I would drive myself crazy."

Hundreds of thousands of skilled workers like Weber are now idle, people the center-left Social Democrats 10 years ago were touting as the new "center" of society. They are people who were convinced that happiness is granted to those who work hard, and that success is based on performance. The sociologist Heinz Bude calls them the "core social classes of the German model." Recently they have been feeling that they are trapped in a downward spiral, and their self-confidence has been undermined. "Fear is rampant in the places where value is created in Germany," says Bude.

In Göppingen, a traditional Swabian industrial town, the numbers reflect this fear. A year ago, the unemployment rate in the district was 3.5 percent, lower than almost anywhere else in Germany. It has since risen by at least a third. In June, 19,913 people were registered as unemployed. But this number only tells half the story. Another 20,000 workers are on short time. Göppingen has become the capital of short-time work and, as a result, the town's reputation is changing. Schuler, the world's largest manufacturer of presses, is in the red and has cut 600 jobs. The slump in the luxury vehicle market has sharply affected automobile parts supplier Bader, which specializes in leather trim. The well-known model railroad manufacturer Märklin has declared bankruptcy. Hard times are ahead for Göppingen. Mayor Guido Till, a member of the Social Democrats, clings defiantly to every sign of hope.

Only recently, says Till, a producer of construction machinery held a topping-out ceremony to dedicate a new building, in the midst of the recession. And he estimates that the town's commercial tax revenues this year will be almost as high as they were last year. In fact, Till insists, the crisis has not really made itself felt in his town, and it is "not even an issue" for the city council. A few blocks from the town hall, on the first floor of the municipal employment agency, there is a meeting of a group of people with a completely different take on the crisis. They are employers from the region who have come to the agency to learn more about short-time work.

"Feel free to ask me anything you like," says Ralf Schneider, an expert from the Göppingen labor agency. Schneider knows that it takes some business owners a long time to overcome their misgivings about asking for help. One of the attendees speaks up. He wants to know whether workers have to use up all of their accumulated vacation days from previous years before they can go onto short-time work. "Yes, the leftover vacation must be used up first," Schneider responds. But what if some have accumulated more than 100 days, going as far back as 2006? "Oh my goodness," says Schneider.

Another attendee asks whether apprentices can be put onto short time. Yes, in principle, says Schneider, but if apprentices fail their final examination later on, they can claim that they weren't properly trained. The employers nod their heads, as it dawns on them that they will have to do more than simply fill out an application form. "Your personnel department won't have to go on short time, I can promise you that," says Schneider. Until recently, the biggest challenge for the employment advisers in Göppingen was to provide companies with enough skilled workers. Now they are struggling with a completely different set of problems.

For instance, apprentices who have not been offered full-time work after completing their training programs are increasingly claiming unemployment benefits. The number of unemployed workers under 25 has grown by 82 percent within a year. And, says agency director Martin Scheel, those who are coming to the agency to look for work are, for the first time, mainly people who have completed a vocational training program. "This time, we can't say that it's only affecting unskilled workers." Many people have come to the bitter realization that even the kind of specialized expertise which was always prized in Germany is no guarantee against losing one's job. This is a consequence of global competition, which is becoming considerably more cutthroat now that the prosperous boom years are over.

Today, engineering companies and auto parts makers from Asia are penetrating deeply into markets for high-quality goods, markets once dominated by German specialists. The Chinese competitors are making products "of a quality that would leave you speechless," says Putzmeister founder Karl Schlecht. Schlecht has a certain amount of admiration for his Asian competitors, for their discipline, their business acumen and their thriftiness -- all traditional Swabian virtues. "They will soon be making the things we make here just as well as we do, but for a much lower price."

For industry veterans, this raises fundamental questions, questions which are on the minds of everyone in the export industry today. Would it have been possible to prevent this sharp downturn? What should companies do now? How can they bring down labor costs even further? Daimler has led the way in this regard. Roughly 60,000 Daimler employees now earn and work almost 9 percent less than they did before. But is this enough? Or will companies have to shift even more of their production away from Germany? Moving production abroad was in decline until recently, but now corporate strategists are rethinking their calculations.

Or could the solution be for export-focused companies to abandon their niches and expand their range of customers and products? Some companies have already taken this approach. Auto-parts maker Bosch, for example, is expanding its renewable energy business. But this is only effective to a certain extent, because Bosch's customers in the wind and solar power industries are also struggling and are often unable to secure the financing they need. The options are unsatisfactory. "We did everything right," insists Mink CEO Zimmermann. He says that he consistently emphasized quality, delivered his products on a just-in-time basis, and maintained a broad base of 20,000 customers and 300,000 products. Even more importantly, his company produces brushes, a product which wears out and needs to be replaced. "We thought that was our life insurance policy," says Zimmermann.

Zimmermann and his son Daniel, who belongs to the seventh generation of Mink owners, walk through a building that smells of fresh paint. State-of-the-art hole-punching machines are lined up on the floor, virtually untouched, precisely placed behind yellow marker lines. Zimmermann constructed the building specifically for Trumpf, an engineering company based in Ditzingen near Stuttgart, at a cost of €3.5 million ($4.9 million). Trumpf needed plastic panels with embedded brushes, which it uses to prevent pieces of sheet metal from being scratched during shipping. But then demand also slumped at the Ditzingen company.

The Mink/Trumpf relationship is indicative of how interdependent companies are in Swabia. When the auto industry is ailing, it no longer needs hole-punching machines from Trumpf. And when Trumpf loses orders, the demand for Mink's brushes declines. The challenge now is to ride out the recession, says Zimmermann. But there is one thing he refuses to do: sell the company. He points to his son and says: "The two of us will be the last to go."

104 comments:

Rove: "So what's a president to do when the promises he made about his economic stimulus program fail to materialize? If you're Barack Obama, you redefine your goals and act as if America won't remember what you said originally. That's a neat trick if you can get away with it, but Mr. Obama won't. His words are a matter of public record and he will be held to them."

LOL!!! Karl had to be rolling on the floor laughing when he wrote that. All presidents, kings, emperors, and whatsits have always done this- and- they ALWAYS get away with it.

And they know they will, ahead of time. It's part of the owner's manual; Chapter Two. And Karl knows too, of course. It's pure posturing.

These general principles apply to all aspects of our future, not just energy:

Everything may be connected to everything else, but only loosely. Scenarios of a lock-step march to disaster betray a poor understanding of the complexity, loose linkage, and resilience of global systems.

If oil were to disappear overnight, we’d be in big trouble. But we have 35 years to gradually descend merely to 1965 levels of consumption. Nineteen-sixty-five wasn’t so bad. Even though world population is greater, energy efficiency increases are greater still. We are an adaptable species—it is our hallmark trait—and the world will change much in 35 years. My bet is on the hairless monkey.

Peak-Oil catastrophists have performed an important service by scouting out the worst parts of the terrain ahead, and by being noisy enough to have alerted many complacent people to the possibilities we face if we act stupidly. And my own scenarios aren’t exactly rosy. Even if we conserve, even if China builds more one-cylinder cars and we all have only one child, the end of the oil age is going to be rough. Worldwide depression and soaring unemployment are almost inevitable as oil gets expensive. Yet even that very dark cloud is lined with silver. Depression, by definition, is a shift from economic growth to contraction, and that in itself means less oil consumption. More importantly, a culture addicted to economic growth will find its absence painful at first, but the end of “bigger is better” can leave room for other types of growth where value is not measured in money: cultural, artistic, intellectual, social—all those things that our crude fixation on economics as the centerpiece of life tends to destroy.

High unemployment could be transformed into fewer people making, buying, and needing to earn money for unnecessary widgets; spending less time at jobs they hate; and producing, alone and in community, a larger share of what they actually need—which does not take 40 or more hours a week. It is an opportunity for the role of economics in our lives to shrink, and for an expansion of time for the many things money cannot, or should not, buy.

Humanity has reached the stage, finally, where basic survival is not in doubt for many people. We have not yet grasped that the struggle for survival is essentially over, and we have overshot. Instead of noticing that as a species we no longer need to labor all our waking hours for the basics of food and safe shelter, and to fight off disease and predators, we cannot get off the survival treadmill. So we just keep making more stuff, rather than looking up, taking a breath, and enjoying all the wonders possible from being a conscious, intelligent animal that has mastered survival. Perhaps Peak Oil, and a return to a time when resources are dear and labor is abundant, will remind us that there is much more to life than the manufactured desire to have more toys. Perhaps we can lose our small-minded obsession with getting and spending, and finally grow into maturity as a species.

Leveraged ETF's have a built in shrinkage. They always trend towards zero. They are a wasting asset. The sector funds are worse in this regard than the broad index ones.

They should only be held for very short periods. 3 days is a long time in them and really any significant move longer than 3 days at the current time in them is extremely odd. Really on principal they shouldn't be used at all but everyone must make their own ethical judgments. They are purely a speculative instrument.

ETF's are derivatives and the big families of them like the financial and REIT ones are the playground of the Pigmen who have so many avenues to arb them between the indexes, the stocks themselves, the levered ETF's, being able to short the ETF's and yes options on them that probably any grade C quant can consistently do well.

I could cry! … to think that the Republican may get their free market wish …again …LET CITI GO BANKRUPT!If you are one of those small business that must in turn go bankrupt, then by all means, call your free market member of parliament. Just don’t call for a bailout or a socialist program. I’ve already given 40% of my savings.Damm!It’s a dog eat dog world out there. (It's too bad that everyone is living a life based on credit)jal

CNSNews.com) – Vice President Joe Biden told people attending an AARP town hall meeting that unless the Democrat-supported health care plan becomes law the nation will go bankrupt and that the only way to avoid that fate is for the government to spend more money.http://tinyurl.com/nguyr8

As far as I can see, the growing indifference, the desensitization, about the numbers of unemployed and foreclosed upon fellow Americans is right up there with the refusal to see what government and Congress are really up to. Our perception of reality is not some constant factor. The only thing constant about it is that it changes constantly. You don't have an opinion, it is being custom-made for you day by day.

You are right. Reality changes constantly. Your entire piece is how apathetically desensitized we all are, almost suggesting that our condition will remain constant.

We will reach a tipping point where we will collectively destroy the notion of Goldman Sachs. Political movements could grow from it. Stump speeches could be nothing more than telling people how badly they are being fucked by GS.

Populism is a force greater than an army or even a lot of money. It can inspire people to accomplish extraordinary things.

"There is something so inherently wrong about this that there is no chance at all that it will turn out good. We're not talking some kind of honest mistake here."

"...You don't have an opinion, it is being custom-made for you day by day. Political campaign managers and main stream media leaders know this, be it consciously or unconsciously."

Those are a couple of good points.

Strictly on a physical level, there is no way this can turn out "good" because evil self destructs and takes as many down with it as possible. There will be much suffering and in this way things will be bad, like a cancer that must be removed, but the outcome for what "good tissue" there still remains in the putrified body, will be liberation from evil.

As far as opinions go, Indeed, how many of our thoughts are truly ours? Programming abounds! What makes the best slave is a slave who thinks he's free. By the same token, us programmed people, otherwise known as sheople (the herd, etc) think we have free thought when in fact most of our thoughts are delivered to us through various means.

That is why despite the exposure of this rotten, corrupt, immutabely evil system the vast majority are still viewing our "reality" from inside the bottle looking out through the frosty glass. Very few have been able to step outside the "bottle" where the view in is much clearer.

I appreciate your confidence in the ultimate ability of people to adapt to a less consumptive lifestyle. The survivors will by definition.

However I do think you fail to realize that the path to that 'ideal' state will change the nature of the game. A contraction in numbers of people will most likely mean that the infrastructures that we take for granted now will be either failing or defunct.

The path down the slope will not replicate the path up. At least not some energy use per capita aggregate number. All energy sources today are more expensive than they were in the past for the simple reason that the low-hanging fruit has been gathered. Most alternative non-ff technology are front-loaded expenditures. The further we are down the slope the less likely they will be affordable to anyone but the wealthy.

There is no question in my mind that we will have a contraction in population. All over the world, fertility rates are dropping, not just the first world. By the time worldwide aggregate numbers peak [my WAG is 15-20 yrs] most people will realize that much of what we think of as civilization was a product of those increasing numbers and virtually free ff energy.

We will do with less, not necessarily more with less. We will go back to human labor being the bedrock of the economy.

Vicky I agree - WAG peak in 15 years or so. A baby bust is inevitable starting now - just as occurred after GD1 which should bring forwards the UN projections by a decade or so.

There is remarkably little professional economic literature on population decline, and what there is always tends to assume an external source of demand so that the declining population can carry on its merry way like the germans or japanese have been doing.

I'm not sure I agree about the return to human labour bit - since there will be a lot less usable labour relative to mouths to feed I think we can look forwards to more automation not less.

Last night I attended our county's monthly emergency preparedness meeting. For our area that includes farmers, pastor, retired folk, social services, EMT/ambulance service.

Our county emergency manager said that word is coming down from federal to state to local to get ducks in order for a potential fall pandemic.

Here's the plan, whatever preventative flu medicines are available with be given in out in the following order:

1) Goldman Sachs2) Critical care workers3) Kids

I love these meetings... We all roared with laughter. But that shows the sentiment our here in the middle of the tallgrass prairie.

I will say this about the meetings... because we are so isolated we suffer no illusions that we will be "rescued" from any crisis- long or short. We know damn well that our well being rests in solely our community and social fabric-- it is an explicit part of the conversation.

Automation and human efficiency were a product of the growing population, ironically. Technology was a boon in the beginning for profits more than reducing the overworking of people. The first ones to recognize the possibility of redundancy were the luddites. And they were right. But eventually efficiency was 'shared' by the capitalists with the workers by reducing hours of labor.

Far more to say on the so-called value of efficiency. As soon as it looked like the workers might actually share more equally the gains the capitalists shifted to lower cost laborers. So to my mind the question is efficiency for whom?

I remember when I was young the techno possibilities were staggering. We would have robots and we would all be on vacation except for the few that wanted to work or the technical fields like medicine or law that would still be around. This meme has been around for a long time. Never happened, never will. Unless you consider desk jobs or working at mc donalds not working.

As the demographics change from growing to shrinking [for the sake of argument, it is caused purely by lower fertility rates not high death rates - in a shrinking population the death rates do exceed the birth rates, but it the old folks in larger cohorts falling off the back of the wagon]] the dynamics are almost the mirror image of the slope upwards. Rather than having large numbers of under 20's we will have the larger cohorts in the adult and aging groups. All the way down. Excepting for the really fragile old, the adult population will consist of more people in their productive years. Presumably the healthy elderly will not be expecting a full retirement but remain workers. [It's the same dynamic as the crisis coming in SS for the baby boomers, but for every generation until final stability whenever that might be].

It is hard to wrap our minds around a change in demographic profiles. And the change in the economic strategies. The profit and debt memes will be impossible to maintain in a shrinking population merely because the future will not be able to produce as much and consume at the same level to pay the debt.

This is precisely why our economy needs to grow and not shrink. All those promises to the future will be broken.

Think of all the tangible assets that will not be necessary such as new housing or schools. Certainly not at the rates we have seen.

This shrinkage won't necessarily have the same issues as when something like the black death comes along and gives the survivors a rarity quality and increases their value as labor.

Economics as we now think of it will deconstruct rather quickly I think once the engines of 'growth' can no longer be sustained. Once it stalls irrevocably all of the technology associated with it will go bye bye.

This is why I claim the bedrock of the economy is human labor. Might take a few generations for me to be proven right.

@vicky: "The profit and debt memes will be impossible to maintain in a shrinking population merely because the future will not be able to produce as much and consume at the same level to pay the debt."

I kind of agree but consider that capitalism can work perfectly well in reverse as people compete to lose the least money. In effect we have had negative real rates sustained by inflation for much of the last 3 decades.

However that inflation machinery is broken now as you say by the tailing off of that very steep slope that's floated all boats the last 3 centuries.

It can be fixed simply by allowing -ve nominal interest rates, as well as +ve rates, which will not only ensure all money continues to circulate thereby short-circuiting deflation by ensuring the market for savings/loans clears, but will automatically generate the inflation needed to keep the system nominally solvent.

If we see that capitalism is in its most simple terms a relationship between borrower and saver, and that the past has favoured the saver (since the future was always bigger n better), the future will favour the borrower, since the future is smaller.

So no only can the debt meme be sustained, it can actually be beneficial : -ve rates will force peolpe to look for alternative stores of value to money - durable not throwaway goods, sustainable housing, renewable energy sources.

In any case, any kind of technological society, even a much reduced one, needs specialists, and specialists need to save, and while there is a need for saving there will be a need for debt.

"If oil were to disappear overnight, we’d be in big trouble. But we have 35 years to gradually descend merely to 1965 levels of consumption."

HUH?

Why do you assume that oil can not disappear overnight? Have you considered the possibility that the credit crunch once it reaches the severe stage next year could result in a global collapse in oil supply. Lets say from 80 mn + barrels to 20 mn or so barrels?

Credit greases the Oil companies, without credit simple maintenance becomes a problem and salaries can not be paid. The little oil companies will shut down and due to a collapsing economy, the ability to purchase oil will decline sharply as well.

It is by taking this into consideration that Stoneleigh is predicting that within 5 years the average American won't be able to afford any oil based products!!!

America uses 10.3 Quads to get 1.4 Quads of food energy out every year, there are 10 calories of fossil fuels used to supply 1 calorie of food. What happens when the available energy declines 80% due to a lack of purchasing power and credit? What happens to the food supply next year?

We don't have a nice 30 years of descent ahead of us. It's in a less then 5 year time frame that we will have to deal with a dramatic decline in energy availability and hence a collapse in living standards and food supply.

Peak Credit has the same effects as peak oil. The only real difference is that we can recover from peak credit after a few decades, we can not recover from peak oil.

Credit greases oil companies. True, but what makes you think credit is simply going to dissappear?

All that is needed to ensure the availability of credit is inflation, and contrary to popular wisdom, quite a number of rabbits remain in the monetary policy hat.

When the confidence-green-shoots boondoggle fails (which may take a _lot_ longer than people think) the central banks have a choice between simply dispensing with the 0% bound or simply handing the printing press to the fiscal authorities. Both will produce sustainable re-inflation and it's easy to show how both course of action can avoid hyperinflation.

Only reason they haven't been tried yet is because both are bad for banksters. However the pressure to fire up one of these solutions will be so immense that the banksters will just have to take it on the chin.

VK, I may be new to this blog but I'm familiar with the North-vs Mish argument, as a long time reader of mish. Likewise am quite familiar with steve keens work (where I post semi regularly).

Let me start by agreeing that printing money and giving it to banks cannot create inflation now. That's what I meant when I said the inflation machine is down.

However, one course of action is that money printed by governments is spent directly into the economy at the bottom in the form of welfare, energy projects whatever. This will certainly be inflationary if the scale is large enough.

Alternatively negative nominal rates would force people currently sitting on large piles of cash to actually spend it or gradually lose it. Hoarding of cash drives deflation and if you eliminate that and ensure all savings continue to circulate there would be no de-leveraging. There are indeed other 'issues' associated with -ve nominal rates, however their inability to combat deflation is not one of them.

To recap, I agree the monetary system as currently constrained is doomed. However I am suggesting plausible ways in which the constraints can be relaxed. To expect that collectively we would allow all money to simply evaporate until its all gone when we have workable alternatives seems the most implausible outcome to me.

Lastly let me point out I am not a hyperinflationist like schiff/north et-al. Rather, I see ways that inflation can be restarted without collapse, and I expect the FED and other CBs see them too.

"Alternatively negative nominal rates would force people currently sitting on large piles of cash to actually spend it or gradually lose it."

This move would be highly deflationary as people would effectively try and 'cash out'. Sweden's Central Bank has put negative interest rates on the deposits of Banks but the banks responded by moving the money elsewhere. (If only I could remember the link of that article!)

If more then 10% of the population decides that negative interests rates are not their thing and they require cash then this would cause the banking system to collapse (though it is going to anyway). There's 6.4 trillion dollars in the form of 'Guaranteed deposits' the banking system while there's only 800 billion USD in physical cash.

IMO if negative interest rates were placed on people's deposits, people would cash out and this would result in the collapse of the banking system overnight. Though the idea of negative interest rates is a good one, it would increase the circulation of money as people are unwilling to hold on to it. Velocity would sky rocket but our present monetary system would have to be entirely different.

I agree that the Government needs to spend more on energy projects and welfare at the bottom something that they have not done. Imagine what could've been done with the trillions in bailout money for the energy sector and preparing for peak oil. I hope something is done but I have no optimism regarding this, the problems we currently face have been building up for decades only to have been ignored or marginalized.

"Fertility: Birth Rates and Trends". Then click on FULL for the graph. This shows a major baby bust post 1929, although interestingly fertility was already sloping downwards from 1900 to 1929.

In general I think that tailing off of robust population growth can be a cause of credit bubbles since people forget where the growth has come from and expect it to go on forever, and the temptation is to then use debt to sustain growth which no longer exists. Likewise a sudden bulge in the 45-55 demographic will produce a temporary illusion of wealth since this age range is the wealthiest in society normally.

If you look at the nordic and japanese and US/UK bank crises can compare them to the shape of the pop pyramid you should find circumstantial confirmation of the above thesis.

Scepticus (PS do I have to type in my openid every single time I post a comment?)

The difference is that they called the market bottom better. If you were on the sidelines waiting for her to call an upward trend, you would've lost out on a 20% rise.

To start with, my opinions are my own. There are many people who use these techniques.

Mr Prechter and I disagree on many things. I have a great deal of respect for his work, which is why I recommend his books, but his big picture is not big enough. For instance, he thinks peak oil is just a scare, and has flirted with the notion of abiotic oil. He really doesn't understand energy, and that is a huge blindspot. As important as finance is, there is vastly more to the predicament we are in. What we do here is to weave the various threads of complexity together

By all means read Prechter's work, especially on socionomics. I recommend it very highly. The herding dynamics that we discuss here come from an elliottwave background, as I have said before (see the primer Markets and the Lemming Factor). That has been part of my analytical framework for about 15 years, but others have been writing about it since before I was born. The theory goes back to RN Elliott in the 1930s, and many people have helped to develop the ideas and their applicability since then.

Lastly, we are not here to make you money. That is simply not our purpose. If you want up to the minute calls and far more technical sophistication than we provide, you will have to look elsewhere. What we are trying to do is to prevent ordinary people from losing everything they have. TAE is not an investment newsletter, it is a public service.

The Bush administration and Congress discussed the possibility of a breakdown in law and order and the logistics of feeding US citizens if commerce and banking collapsed as a result of last autumn's financial panic, it was disclosed yesterday.

Making his first appearance on Capitol Hill since leaving office, the former Treasury secretary Hank Paulson said it was important at the time not to reveal the extent of officials' concerns, for fear it would "terrify the American people and lead to an even bigger problem".

They are going to claim that Stoneleigh is not here to provide investment advice. That she is here to give broad strategy, not specifics. They say these things about her but condemn other people who in fact do the same thing and claim that these others cannot be trusted like Stoneleigh.

Who have we condemned and in what context?

You will find many strands to my ideas - Prechter, Tainter, Greer, Heinberg, Darley, Van Creveld and many others. The influences are too numerous to mention, but the synthesis is mine. Think of it as an eternal search for the big picture.

Desensitization - like the boiling frog analogy.We allow our government to commit criminal torture, openly spy on it's citizens, detain and hold anyone labeled an enemy combatant, and now we witness the largest transfer of wealth in U.S. history.How much more will we tolerate?

From figure number 6 (presumably in live births per thousand in the USA)

1920 - 27.71930 -21.31940 - 19.41950 - 24.1

We can see that while the actual fertility dropped somewhat during GD I, the rate of the fertility drop decreased tremendously from earlier decades, indicating a trend reversal. So it would be accurate to say that GD I actually started to reverse the trend of falling fertility though other factors played a part.

I only skimmed the article, but the author noted that reduction of fertility rates can occur without modern contraception as indicated by simply observing the data, but I could not find an explanation of how.

"This move would be highly deflationary as people would effectively try and 'cash out'."

That is mish's thesis, held by other deflationists too. OTOH, the hyperinflationist camp feels that -ve nominal rates would be hyper inflationary. I think that the tendency of both camps to see what they want suggests a certain amount of book-talking and perhaps lack of real analysis.

Either way it shows that -ve nominal rates are badly understood and more work is necessary to understand the dynamics.

I'm not claiming to be an expert in them by any means. I have arrived at my current point of thinking about them by looking at them simple as the continuation of a long secular decline in the cost of capital rather than specifically as a solution for re-inflation.

And don't forget that cashing out is the aim of negative rates, not something to be avoided, since it keeps money in circulation. Almost any form of asset into which investors could move would have carrying costs and so cashing out would need to be a carefully considered decision even with say a -2% rate on savings.

"And don't forget that cashing out is the aim of negative rates, not something to be avoided, since it keeps money in circulation."

I agree that negative interest rates are a good idea BUT that would require a completely different way of doing business, investing etc. A complete reworking of the monetary system if you will.

The thing is that at present, if negative rates were implemented, people would rush out of the banking system and hoard the cash as there would be a huge loss of confidence as the banking system would collapse due to it's fractional reserve nature.

Could you please explain more about the following comment,

" as the continuation of a long secular decline in the cost of capital rather than specifically as a solution for re-inflation."

And why has there been a long secular decline? Why shouldn't there be a secular rise in the cost of capital as evidenced by all the malinvestment caused by this secular decline?

Also could you elaborate your theories some more, the mechanisms of how it would work? Thanks.

Ah, the thugs and goons of Goldman Sucks are busy rehabilitating their reputations in the whorehouse of Congress. How sweet.

What is a criminal syndicate like Gollum anyway? Is it just a building with office equipment and computer data bases and disposable employees? Does it make anything of tangible value to help humanity?

Max K had said during the first TARP extortion that "Hank Paulson's head should be bouncing down the Capitol steps"(amen brother) but does that mean that eliminating the head mobster at GS would stop the blood funnel in it's tracks?

No, of course not, because the individual players in any organized criminal syndicate are always disposable.

It's the meme, the institutional memory of how to rape and plunder the society that they have parasitized that allows the Goldman Sach's of the world to continue. The memory template of thievery is bigger than the sum of it's parts.

You could take the whole lot of Wall St and literally crucify them from lamp posts all through Manhattan, and still, the bastards would reincarnate from the memory template of thievery.

Al Capone died a twitching, babbling, drooling death in prison as syphilis ate his brain stem. I can only dream of that fate for Paulson, but it did not even slow organized crime down in the country for more than a couple heart beats.

Only when the mechanism of institutional theft is revealed and known and understood by the majority of voters will this pathology even have a glimpse of a chance of being kept in check.

The Sheeple are 'united' at this point in history only by their 'herd behavior' (unconscious), not their conscious rational faculties.

It remains to to be seen if Duhmericans are even capable of higher forms of rational thought, who knows, maybe they aren't and never will be. Maybe they are fated to remain the programming equivalent of Sub-Routine Prole Loops for Infinity (SRPLI)

Mad Mad Max has a wonderful rant on Goldman on French television - perhaps his best one yet in terms of content, amusement, and wrathfulness.

He also discloses himself as a closet "truther" (7:47 part 1) by stating, when his debating adversary noted that the records for auditing much of the central banks couldn't be recovered, Max noted that they were in the "exploded WTC 7 - how convenient."

Max is a financial vaudvillian, a showman. He lives for performance and is very amusing in his often spontaneous turns of phrase. I don't think he writes that much. Ilargi's writing is as informative and snarky and entertaining as Max's multi-media shtick. I always check in and thoroughly enjoy both of them.

@VK, if everyone tried to rush to paper cash right now you'd find that it simply dissapears from circulation leaving the vast majority of people holding their welath as electronic money. Likewise for gold.

To address this buiter, mankiw etc have suggested various ways of attaching carrying costs to cash such as discounted exchange rates with electronic money. However havnig say 50K in 5 dollar bills would have significant carrying costs and risks. Some japanese have suggested dispencing with paper cash entirely.

To move on to your question re cost of capital, it's classix marx: the tendency for the rate of profit to fall.

Summarised quickly my proposal is that since CDs and bonds have outperformed the equity market over two decades that the cost of capital has been too high.

The emergence of the pensions industry coupled with a large number of asian nations of savers running huge budget surpluses has resulted in a demand for saving that implies a level of debt that cannot be sustained by society.

The long run up in PE ratios over the last decade is seen by some to mean that equities have been overpriced, but I see it more as a scarcity of equities compared to demand. What has been overpriced are bonds and loan rates.

The number of savers compared to borrowers is forcing capital costs down, and were it not for bretton woods II and the west agreeing to take on debt so everyone else could save, there would have been no borrowers at all at rates significantly above 0%.

Had recent borrowing been done at rates which I feel represent a fairer accomodation between supply and demand for capital (lets say 0-2%) I think it very unlikely we'd have a debt problem right now.

What gets in the way are historical expectations investors have about what constitutes a fair return, and also various notions many conservative types hold that eulogise savers and demonise borrowers.

The increasing specialisation of roles in technological society also drives saving up, but I'll cover that later since this post is long enough already.

Max has teamed up with Stacy Herbert (in several respects as in matrimony). She is much more the careful informational blogger and fact checker, though in a more subdued way, just as radical as Max. Max is having fun, but since he has access to MSM in Europe, he may have an effect on the understanding of European variety sheeple. He is the only one that can make me laugh while discussing Gollum Sucks.

Those who wish to prevent the dissemination of information or to redirect the attention of the readers are using two common tactics.

1. Start a diversion discussion 2. Burry the “specific terrifying thought” by using many entries (“lots of static”)

This blog has been hit by those tactics more often than you realize. It could have been deliberate or because a “truth” had been revealed that would cause someone’s logic to be proven false, had the discussion continued to be explored.

More than once, I&S has dropped a few comments that made me think that he feels that the thread had been "highjacked."jal

Max K has always framed the current economic mess as a war between Savers and Debtors.

'Living within your means' is a characteristic of Savers.

"Living Beyond your means' is a characteristic of Debtors.

Which is more desirable for a society?

Which is more Morally desirable for a society?

Someone espousing that people's savings are being 'wasted' because they are not contributing to 'capital formation' in the Market Place is a fascist ideal.

You 'little people' don't know the best use of your money/savings, only the Holy Market place does, and besides, you're unpatriotic for 'hoarding' your money and not putting it to 'work' for the good of the Fatherland.

"Living Beyond your means' is also a characteristic of an ecological death wish.

"Living Beyond your means' on a finite planet is impossible and defines the person as irrational and dangerous to themselves and those around them.

This is what the US and many other countries are pursuing as a goal. This is a perverse, mutant form of a Grand Ponzi and will end in death and destruction for all.

We've just seen a living breathing example of what turning loose cheap credit does to 'the People'

McMansions in the middle of No Where, 9 mile per gallon SUV's in every driveway and mountains of unpayable debt in every direction.

The US has been punishing people who save and rewarding people who abuse credit.

This is about to stop. And stop very violently as the US economy hits the side of the mountain at 650mph.

Ever see a plane crash wreckage?

It's an unspeakable horror.

Body parts and the contents of luggage strewn through the treetops.

Had America's saved instead of being sucked into a blackhole of debt, their Fate would not be Sealed as it is today.

In which case the argument becomes, "What part of the cycle is our 'economic model / civilization / species' (take your pick) now on?"

Extreme Cornucopians say we are still in the upswing... so keep on truckin'. Total doomers say it's a death spiral. Repent, sinners, for the end is upon you!

Personally, I'm a centrist kind of guy. The view from here tells me we're at or near the top and should prepare for a long decline. I would like it to be a very very LONG decline... millions of years would be nice.

My theory is that those with adequate capabilities for adaptation, will (by natural selection) turn the decline of homo sapiens sapiens into the rise of sentient beings who resemble our better aspects.

The competition has begun. The game is afoot. May the best life form win. (That, at least, is something you can pretty well count on.)

"..it was important at the time not to reveal the extent of officials' concerns, for fear it would "terrify the American people and lead to an even bigger problem".

that friends and family who thought that I was overreacting will be hearing from me soon.

I'm going to rub their noses in Paulson's piddle until they acknowledge the dimensions of this disaster.

The mere fact that the administration and the Treasury Department were discussing 'the possibility of a breakdown in law and order and the logistics of feeding US citizens' will be tough for the 'Don't Worry Be Happy' crowd among us to rationalize into their misguided pathological optimism.

Paulson was speaking like what he did was in the ancient historical past and that now, from the lofty perch of financial safety via the failouts, we can look back on it all and laugh.

Talk about delusional thinking and denial. It would make members at an AA meeting blush.

"... Paulson was speaking like what he did was in the ancient historical past ..."

"I'm going to rub their noses in Paulson's piddle until they acknowledge the dimensions of this disaster."-------- One thing is sure ... he changed the timeline of I&S prediction ... His action let me have another "normal Xmas"jal

“I further explained to him that, under such circumstances, the Federal Reserve could exercise its authority to remove management and the board of Bank of America,” Paulson told the House Oversight and Government Reform Committee on Thursday. “By referring to the Federal Reserve’s supervisory powers, I intended to deliver a strong message.”

Duhmerica takes another blindingly swift kung fu drop kick to groin and can only manage a confused groan:

The demonisation of debt is part of the desentisiation process, or rather it's the next step of the process.

Debt-hate, and hate of debtors is an emerging form of populism. During times of crisis as in 30's germany populism desensitizes people by giving them something they can understand to grab onto. In late 30s germany it was the jews.

The point about populism is that it offers a simple and on the surface plausible explaination of the pain people are feeling and offers a plausible path out of that pain.

Populism addresses obviously visible symptoms, but without an understanding of the real underlying problems, all the solutions it advocates are in fact the road to hell.

People cannot seem to accept the reality that saving and debt are two sides of the same coin and one cannot be had without the other in any closed economic system like our planet.

"People cannot seem to accept the reality that saving and debt are two sides of the same coin and one cannot be had without the other in any closed economic system like our planet."------ Are you in favor of usury as part of the system?Can I have a big bonus too?jal

A friend of mine is a saver and a planner. Recently, she and her husband were visiting an acquaintances’ home. They were chronic spenders and were in debt over there heads; including a middle five figure Vegas trip just recently. They were complaining about how hard it was to keep up with their payments. My friend suggested that they stop spending so much, give up some of their toys and live more simply.

They were stunned by the idea that they should spend less and not keep up with the Joneses so to speak; completely unable to comprehend the idea. They actually had the nerve to call my friend both “Stupid” and “Unpatriotic” for not following their free spending ways and stimulating the economy.

They are ones drowning and are one job loss or emergency from complete ruin.

On the fertility rate, given the high unemployment and stress of coping where I live, suicides have become more frequent, sadly including whole families on a couple of occasions. Probably not statistically significant at this point, but another way in which population will reduce itself.

One of the root causes of the present crisis was actually negative REAL interest rates. Following the tech bubble burst and 9/11 the FED artificially lowered interest rates for too long, while the home price rises didn't show up in the CPI as it was replaced by the Owner's Equivalent Rent which showed home price rises of 2.9% annually over the bubble years while Case Shiller was showing a more then doubling!

So negative real interest rates led us to this crisis, so how would negative interest rates lead us out?

Historically, the lender, the capitalist, the banker, was the same person who lent to a borrower that he knew.He would lend to the farmer money for seeds etc. If the crops came in then the lender would get his money back from the sale of the crop. However, eventually, the lender, figured out a limited liability for his service. No down side risk.

He would lend the money to the farmer but would insist that if he did not get paid back then the borrower would have to give up his daughter, send his children to work off the debt, or lose his land or his life. This was the beginning of usury, a guaranteed of return of the loan with interest. No matter what happened to make the lender not be able to repay the loan.

In our present social structure, the lender has become a “banker”. The capitalist has be come the “borrower”. The farmer has become the “wage earner”.The only one benefiting from this system are “the bankers” and the “bonus” recipients.jal

VK, what led us into this crisis was exactly as you say : we borrowed at say +4% to +18% (CCards) when real interest rates were say -3%.

It's the difference between the offered rate and underlying real rate of growth that will determine whether too much debt accumulates.

I'd see a 3% loan rate as a good example of usury if real underlying growth was -5%, as it is now.

Of course the problem was exacerbated by people using loans for consumption and banks making loans to people who wouldn't be able to repay. That issue is separable from the cost of credit, but can also be seen in the light of pressure from a severe overhang of savings looking for somwhere to go.

I'm not trying to justify excess, I'm trying to highlight why I think it arose.

jal, a bond is a store of value in a society which saves nothing. Our surplus, that is agricultural, energy, primary goods etc, cannot really be stored effectively for any length of time.

Accordingly our civilisation does not save a bean, but manages to provide individuals the opportunity to save some personal surplus value in the form of promise from another to give it back later.

A promise has no physical carrying cost and is a perfect vehicle for storing value, while at the same time avoiding the hoarding that saving would otherwise become.

Capitalism of this form (savings as spendings) arose at exactly the time when our surplus rocketed from about the mid 1750s as a result of the agricultural revolution (also called ironically, the green revolution).

"A promise has no physical carrying cost and is a perfect vehicle for storing value, ..."------ so you wish for ... not in this world!Get real, the bag of sugar has been emptied by the dealers/middleman/bankers over and above the cost of doing business in the spread. (The spead is causing the inflation)jal

"People cannot seem to accept the reality that saving and debt are two sides of the same coin and one cannot be had without the other in any closed economic system like our planet."

The problem is not us stupids don't ken no savings/debt dichotomy or even populist constructs, it is instead Financial Terrorism and elite criminality run amok has brought us low. And we should be very pissed about it.

All this discussion now brings us to why CITI is going bankrupt. CITI is the lender, but the “bankers/traders will get their bonus.

The capitalists/business owners cannot get more loans and cannot pay back their loans. However, they won’t have to sell their daughters.

The workers, who made the products will find themselves on the bread lines and in the shelters.That is how the financial system works.Depending of where you are in the pecking order … it’s a great system!Too bad it’s crashing and that it is not sustainable.jal

It is the CIT Group going bankrupt, not Citibank. CIT may not be a household name, but its borrowers are - Dunkin' Donuts, Filene's Basement, Dairy Queen, and many others. The company is the nation's largest lender to small businesses. It has more than $5 billion of outstanding loans to more than 1 million borrowers. And the government appears ready to allow it to become the fourth-largest bankruptcy in U.S. historymore text, and a videohttp://www.cbsnews.com/stories/2009/07/16/eveningnews/main5166641.shtml

Perhaps Citibank also bankrupt, but it is the CIT Group in the news as bankrupt.

I use Earth Day 1970 as the date we should of started the ramp-down process.

Nobody wanted to hear it.

The precious buffer time is gone forever.

The 'dog ate my homework' juvenile excuses for not starting are pathetic and hollow and not something real adults would engage in.

Anyone who has done some mountain climbing knowns that you have to save some energy for the descend, which often times is harder than the ascent. Different muscles, the front of your thighs are burning with exhaustion, hard to hold back the downward momentum of backpack and body weight. The sun going down, time pressure, don't want any injuries from carelessness but the tired feelings make the mind drift.

The old familiar drill.

Accept this time, it's for the Whole Cookie Jar. Don't drop it over the cliff, it can't be replaced easily.

And then you get Wolf Blitzer on CNN yesterday yakking with Carville about mis-deads of the previous administration with Blitzer saying to the effect of its not productive to dwell on the past, rather the Democrats should look forward.

Blitzer is in thick with the rest of the thieves and he is promoting a culture of unaccountability. If the present "administration" knows the one succeeding it will "look forward" only, then it's game on...anything goes, and that is what's been happening for a long time.

We know what happens to the very few well intentioned (good) presidents, do we not? It is just one of many pointers as to the dark essence presiding over this world.

It's not about mistakes, mis-reading, or incompetence. It's not about the appearance that a "few bad apples" (the favored ones of darkness which are supported and sponsored by it) have screwed the planet up. It's not about upbringing, education, genetics and brain chemistry.

It is about the problem of evil and how we're all affected by it. All of us.

Divide and conquer by setting up a system where what's good for the goose isn't good for the gander. For someone's gain another has to lose. Everyone has different interests by race, region, social status, religion, finances. That is how we have been controlled and steamrolled over by the ruling elite.

How can people stand united when barriers between unity have been implemented to keep us squabbling amongst ourselves?

D. Benton Smith said: My theory is that those with adequate capabilities for adaptation, will (by natural selection) turn the decline of homo sapiens sapiens into the rise of sentient beings who resemble our better aspects.

The competition has begun. The game is afoot. May the best life form win. (That, at least, is something you can pretty well count on.)

My money's on the raccoons. (And the possums of this continent.) Shrewd, adaptable to all sorts of eco-niches, intelligent for their size. Lack of opposable thumbs is all that's holding 'em back! That, and the presence of our species. But we seem to be taking care of the latter situation ourselves. In 10 million years, look out -- furry city!

"Savings and Debt are not two sides of the same coin, since central banks charge interest on money creation,all coinage is therefore created with original doublespin."

No. With +ve interest rates, banks place their reserves with the central bank by buying government bonds for X, with the government promising to buy them back at some fixed point in the future for X+Y.

Y is created out of thin air and gifted to the banking system. The idea being that if banks can get X+Y as a risk free investment, then that sets the interest rate for the rest of society > Y.

The above value Y is the repo (repurchase) rate.

If we had -ve interest rates, then yes the CB would be charging interest on reserves, the repo rate would be negative.

Paradoxically, the greater the value of Y, the tighter the monetary policy so I don't think your point here holds any water.

If you've understood steve keens roving cavaliers piece, then you should see that banks create money at essentially whatever rate they like out of thin air and there is no direct link between this and what reserves they hold and what the repo rate is.

That's why printing money and putting it into bank reserves is not going to reflate.

I cannot for the life of me understand how anyone would recommend that book.

On ~ page 3 he lavishes high praise for the Federal Reserve. I should have stopped reading right there. The rest of the book was as elementary as it gets. Homer-Dixon highjacks, err, I mean synthesizes, bits and pieces from other people, to regurgitate the same message that has been written about in hundreds of other books.

Stoneleigh- what about Homer-Dixon's book struck such a chord with you that you found it necessary to recommend? Did you first learn of the things he wrote about from him? Or are you friends and just doing him a favor?

Even the Panzner book is a regurgitation. And much of what Panzner is saying is what Stoneleigh says.

I guess when I read a book, I want to learn something. Not just get a re-packaged $15 item that is regurgitated material. This happened with the peak oil genre. There were like 20 books that came out all explaining the same exact topic in their own, synthesized way. Probably to make a quick buck off of the growing peak oil movement.

We are about to see the "Twinkie Defense" updated and reissued for the 21st Century.

Based on the widely held belief that it is non productive to dwell on the past, this new defense will be worded something like:

"Your honor, members of the jury, I will show you that my client's capacity is diminished by the prosecution's counter-productive obsession with the past, and that you are duty bound to acquit so that he can get back to growing our economy to infinity and beyond!."

We'll call it the Wonk Wanker Defense and become the richest defense lawyers of all time.

It will especially popular with bank robbers, robber banks, and convenience store stick-up men.

Yup, the raccoons have got a real shot it... although as the humans phase out the raccoons must compensate for losing so many push over burglary targets all at once. It's a tough calculation. Fewer 'marks' but more gardens. It might balance out.

Buzzards, on the other hand, are going to have an unlimited supply of fresh meat at the start, although that too is subject to sharp decline (peak carrion?)

Maybe our own Gallinazo would have some insights as to their respective prospects. And don't forget coy-otes! That grin of theirs makes me nervous... like they know some joke on me that I haven't heard about.

"Exxon Mobil Corp., the largest U.S. oil company, may be fined more than $1 billion for “malicious” sabotage of wells to prevent other producers from tapping fields it no longer wanted, the Texas General Land Office said.

Jerry Patterson, commissioner of the land office that oversees oil leases that help fund Texas schools, asked the Texas Railroad Commission to conduct hearings into an alleged 1990s program at Exxon Mobil of plugging abandoned wells with trash, sludge, explosives and cement plugs. The barriers made it impossible for other producers to revive the wells, Patterson said in a statement he gave to Bloomberg News yesterday."

@Anon 3:02The OC version of your mountain climbing analogy is surfing. Since it's extremely crowded and competitive at the top breaks, one has to budget their peak energy period if they want to catch any (decent) waves.

As I've gotten older, my peak energy has dropped to around 2 hrs, which means I have around two hours to play at the prime peaks before I have to drift off to secondary peaks and then eventually head in.

A lot of guys have different fuel-up strategies - mine is coffee + sugar. You've got that hungry wildman look/attitude when you first get out there, and the guys already tapping out fall back.

However, soon enough, the energy drain happens to you as well. You just don't have the burst and no longer possess the aggression level necessary to commit when you need to charge.

Even worse, the next crew is paddling out, and guess what? Yeah, they're fully amped and charged up, so forget catching a break from them. Their sole objective is to get as many waves as possible, and if you can't keep up, then TS.

So off you drift down the beach, as your energy level rapidly diminishes to the point where you're just trying to get a wave in. If you're really (un)lucky, you get caught in a dreaded "trying to get a wave in" situation were you literally can be reduced to simply paddling in.

Next time I knock over a 7-11 with my nine, I'm gonna tell the judge in my best Obama imitation, "Don't dwell on the past - look forward." And she's going to reply, "You are absolutely right. You can look forward to 15 years in the slammer."

A good analogy, many Rock Climbers are injured after the climb when tired and hiking/climbing back down.

It also helps to pay attention to what’s going on around you. I have a friend who was struck by lightning and fortunately only slightly injured while trying to jumar back from the Lost Arrow to the canyon wall in Yosemite. I wasn’t there that day but asked him why the hell he didn’t get off of the rock spire sooner. He said "the storms blew up so fast we didn’t have time". As an amateur meteorologist, I knew if he had been paying attention to the clouds and thinking instead of smoking a bowl out there, he would have had plenty of time to get off and told him as much.

Much of our society has been too busy enjoying themselves or trying to get ahead to pay attention to the signs that something’s amiss. Some like my parents have gone their whole lives in what looked until recently to be increasing prosperity and increasing technological gain so it’s hard for them to see that there are limits. Others have been too busy living in the moment or in denial to pay attention to the gathering clouds.

All helped along by the MSM that says pay no attention to the clouds gathering if they say anything at all. So “Smoke that bowl. Spend money whether you have it or not, don’t worry, be happy”. One of the reasons I come to this site is for the alternative views.

I’m not saying the world will end tomorrow, but there are a lot of problems out there and I have chosen to save and plan as best as possible. If cornucopia is our future, then it won’t matter, if it is something worse, then my family may avoid more suffering than needed.

I still can't wrap my head around why negative rates will be beneficial. IMO I reckon it will crash the present monetary system faster as people will be driven out of the banking system because of the fear of losses.

On a local level, I reckon local currencies using the principles on negative interest could substantially help as this increases the velocity of money and no hoarding occurs, a gift giving economy as Charles Eisenstein puts it.

On a macro level, I still think these are the correct solutions to the banking crisis.

1) Letting the insolvent banks fail, while private deposits should be guaranteed and shareholders should get wiped out. Management should be cleared out, the major bondholders would face huge haircuts in their ‘wealth’ and become the new shareholders. This would clean the system up and let trust rebuild.

2) The Government could create 1,000 regional banks. Injecting each with 700 million dollars. This amounts to 700 billion dollars (what was spent on TARP)

3) With reserve requirements at a conservative 10%, these regional banks would be able to create 7 trillion in additional lending capacity.

4) With 1,000 small to mid sized banks, risk becomes diversified rather then concentrated within 20 or so global too big to fail giants.

5) Regulations should be passed to regulate derivatives on exchanges with strict margin requirements, the way the Chicago Futures Market operates for example.

6) The Ratings Agencies should change their model from ‘Issuer pays’ to ‘Buyer pays’ such as the one Egan Jones follows.

7) No bank should be allowed to leverage up more then 12:1 and Investment and Commercial banking should be kept separate. (Glass Steagal 2 basically)

What is it the banks are doing to make money and look good in the market and pay off the tarp? Selling off the good stuff? They said they didn't want tarp and if they had decided they could hide the bad away, is that why?

A Company like Goldman got 10 billion through TARP which it paid back but they chose to pay this back as TARP was costing them I believe between 5 - 7.5% interest annually and there might have been restrictions on executive pay and bonuses (GASP! The Horror)

So they simply decided to pay it back and conveniently the US Government decided to launch TLGP through the FDIC where banks such as JP Morgan and Goldman can issue bonds with explicit Government guarantees. These attract a high number of bids thus they only had to pay 200bps above Treasury bonds. They got a good deal!

Goldman issued 28 Billion through the 'Temporary' Liquidity Guarantee Program which amounts to an infinite subsidy.

This money was then used by Goldman to speculate on the stock markets and commodities markets. Banks have not been having much success finding good clients to lend to and the real economy is not healing, so they are gambling with tax payer subsidised money :)

Asset values are declining sharply, TARP was an equity injection to keep the equation from breaking apart but as they paid it back they took more liabilities in the form of the TLGP subsidized bond issues, hence temporarily keeping the equation equal with the help of tricky accounting that lets you keep asset prices at imaginary levels.